In International Shipping News 09/06/2015
Dramatic changes in energy commodity trades in the past twelve months have greatly affected global freight markets. Some big surprises occurred, with huge effects on energy commodity export supply or import demand, or both. These events added to uncertainty about how worldwide trades and shipping markets will develop in the near-term and longer-term future. The sequence of events, why these changes happened, and what may be implied for the period ahead are discussed in this article.
Within this commodity group oil trade has seen strengthening influences while, by contrast, coal trade has seen weakening influences. Global oil trade received a substantial boost from the surprising strategic decision of the Organization of the Petroleum Exporting Countries, towards the end of last year, to make global market share preservation a priority. The resulting much lower international prices for crude oil were instrumental in revitalising trade movements.
For world coal trade, an abrupt change of trend in the largest importing country caused weakness last year and into 2015. China had quickly become the top importer, and there were expectations of an upwards trend continuing. The sudden reversal in 2014, when a large reduction emerged, was not widely expected to occur then, although it had been considered as a possibility for sometime in the distant future.
Changing patterns shaping current trade
What is the significance of the energy commodities group within the broad spectrum of international trade, and how has it developed in the recent past? Bulk movements of dry and liquid energy commodities comprise over two-fifths of world seaborne trade volume in all cargoes. Over the past decade, from 2004 to 2014, an upwards trend has been seen. As a proportion of all world seaborne cargo trade, however, energy commodity movements decreased by several percentage points, from 46-47 percent in the early years of the period, to 42 percent in 2014, amid faster enlargement of other trades.
Total seaborne energy commodity trade reached an estimated 4.44 billion tonnes in 2014, based on calculations derived from statistics compiled by Clarkson Research. This volume was 30 percent higher than seen ten years earlier. Annual expansion averaged 2.7 percent but, in the final two years of the decade growth was reduced to under one percent annually.
The group’s largest element is oil (crude and products), which increased by 12 percent to 2785 million tonnes during the decade, reflecting rising oil products shipments. Crude oil trade rose slightly before declining, ending the period about 2 percent below its level at the beginning, at 1806mt in 2014. Products trade, by contrast, maintained a rising trend throughout, reaching 979mt in 2014, a 51 percent expansion over ten years. The result of these contrasting changes was that products movements became a much bigger part, over one-third, of the oil total.
Coal forms the second largest element. Almost four-fifths consists of steam coal, used mainly in power stations for electricity generation, but also by cement manufacturers and in other industrial processes. The remaining one-fifth is coking coal used by steel mills. Overall coal trade rose strongly by 88 percent during the 2004-2014 period, reaching 1210mt last year. Annual growth rates were mostly strong up to 2013, followed by a sharp deceleration in the past twelve months. Within the decade as a whole, steam coal trade grew most rapidly, doubling to 949mt at the period’s end; coking coal trade rose by 52 percent. Related, relatively small additional components of the group are anthracite, coke and petroleum coke.
Finally, in this brief outline of how energy commodity trade has evolved, derived from Clarkson figures, liquefied gas trade – LNG (liquefied natural gas) and LPG (liquefied petroleum gas) – forms a substantial part. Total seaborne gas movements increased by 73 percent between 2004 and 2014, reaching 317mt last year. LNG trade growth was most rapid, at 87 percent, to 247mt in 2014, although this annual total was attained three years earlier, since when the trend has been flat. LPG trade – a large proportion of which is not required for energy purposes, but is used as a feedstock for manufacturing – rose by 37 percent during the decade.
A complex web of influences
One aspect of the background to this pattern of expanding energy commodity trade is especially notable. Beginning in the final months of 2008 and continuing through 2009, the global economy experienced its worst setback since the world depression earlier in the century. What became known as the ‘Great Recession’ was caused by the global financial crisis and collapse of leading financial institutions, starting in late 2008. As a result of the downturn, economic activity in many countries contracted, and trade was severely disrupted, with declines in trade movements a typical consequence. A robust rebound occurred in 2009-10, but global economic performance subsequently has been generally mediocre. Yet, apart from one annual decline in 2009, when a 2 percent reduction occurred, energy commodity trade remained resilient and growth persisted.
As is well known, energy consumption and, in turn, trade in energy commodities is closely related to global economic activity and industrial output. Changes in activity have corresponding effects on energy requirements. It is a very general relationship which varies according to circumstances. More specific links are trends among the advanced economies (USA, Europe, Japan and several others), where energy intensity has slackened, compared with trends among emerging economies (China, India and many others) where energy use has been intensifying and may continue to do so. When economies become more mature, their energy intensity typically recedes amid a shift from manufacturing and construction towards services.
That background provides a broad explanation of changes in energy trade. Another key influence is competition among various fuel sources, reflecting relative prices and availability. Variations in inter-fuel price relationships have a prominent role in determining the mix of energy inputs. In some energy importing countries also, domestic production of energy commodities is a relevant factor. Domestic output can be affected by commodity prices in the international market and freight costs, which determine the delivered price of competing foreign supplies in the domestic market. Sometimes political influences affect domestic energy commodity output volumes as well.
Oil has been largely supplanted in power stations by alternative fuels, although it remains the dominant fuel for road vehicles globally. Coal absorbed much of the power station market after the two oil crises of the early and late 1970s but, more recently, natural gas has competed vigorously and is now often the preferred choice.
Nuclear energy, and energy from renewable sources (principally water, wind and solar) is also relevant. These sources do not directly have a significant impact on seaborne energy commodity movements, but have an indirect impact. Electricity generated from uranium and renewables is often very competitive. Frequently it is subject to fluctuations, affecting consumption of the widely traded energy commodities. In some countries with substantial hydro-electricity generating capacity, production variations from year to year resulting from weather changes (determining rainfall amounts and reservoir levels) cause great fluctuations in demand for power from other energy sources.
Moreover, the nuclear and renewables power production trend, and to some extent the gas power production trend, is not always solely determined by economics. In many countries government policy on environmental aspects is a factor affecting choice of fuel type. Frequently this involvement has led to an emphasis on ’clean’ fuels, the main effect of which has been to phase-out coal burning in electricity generation plants over a period of time. Subsidies or other financial incentives are a prominent feature used to promote nuclear and renewables power output.
Oil, gas and coal: trade trends diverging
Global energy commodity trade is still expanding, and growth in 2015 could be above the sluggish rates seen during the past two years. But the pattern is unlikely to be uniform. While oil trade seems set to increase moderately, accompanied by a robust rise in LNG movements, coal trade prospects are subdued. It seems possible that little or no growth, or even a marginal reduction, in world seaborne coal trade will occur this year, which would be especially notable after more than a decade of uninterrupted expansion (at greatly varying annual rates).
In the oil trades, annual statistics have not yet reflected last year’s dramatic change in global oil market circumstances. Crude oil trade in 2014 apparently was down slightly; however, oil products trade rose by enough to provide almost a full offset, ensuring that overall oil trade was almost unchanged. The big event changing market drivers and perceptions of future activity occurred towards year-end. Assuming that the new circumstances persist for an extended period, oil trade growth this year and further ahead could be enhanced.
At their end-November meeting last year OPEC members, heavily influenced by Saudi Arabia, the dominant producer, switched their stance on market strategy. Previously, there was a long-established focus on maintaining relatively high prices, amid declining import demand from some major buyers. The aim had been achieved by adjusting output downwards to support price levels. But it became more difficult to manipulate the market in this way when rapidly rising US shale oil production was adding to global excess supplies. Crude oil imports into the USA almost halved over the decade to 2014, falling from 23 percent to 12 percent of global seaborne crude trade, reflecting surging domestic output. OPEC strategy abruptly altered to prioritise attempts to preserve members’ global market share through the price mechanism. Continued output and export restraint with more imposed cutbacks was rejected, and replaced by a policy of enabling exports to be determined primarily by price levels, which implied accepting the lower prices resulting.
The severe fall in international oil prices, from around $110 per barrel in mid-2014, to under $50 per barrel in early 2015 (based on Brent crude), from which there has been a partial recovery to the $60-70 per barrel range recently, proved very positive for oil trade movements and tanker demand. A seasonal strengthening of the global oil import pattern in last year’s final quarter was augmented by extra demand, related to lower prices, for direct consumption and for stockbuilding. Commercial inventory accumulation was accompanied, in some countries such as China, by more strategic stockbuilding. Land-based stocks were expanded, and there was also a new element of floating storage aboard tankers chartered for this purpose.
Expansion of refinery capacity in a number of countries over the past few years has also facilitated additional trade in crude, as well as oil products movements. Refiners’ margins improved as a consequence of lower crude prices, encouraging more output of products for both domestic and export sales. Several new refineries in the Middle East Gulf and India, with export orientation, greatly increased their production and shipments to foreign destinations, benefiting products trade.
In the LNG trades, expectations for global movements during 2015, when a return to robust growth seems likely, contrast with events in the past three years. Slightly reduced annual movements, at the beginning of that period, were followed by a slow recovery, back to the peak level which had been reached in 2011 after a long and vigorous upwards trend. The weak performance in recent years occurred despite strongly expanding imports into Asian countries. Europe’s imports halved, while US purchases declined because of rising domestic shale gas output. This year, additional export supplies could become available and, coupled with sustained growth in imports into Asia, accelerating global trade is expected to result.
Contrasting with other energy commodity trades, and with its own past performance, coal trade seems to be facing a much more uncertain future. Many years of strong expansion appear to have ended. This prospect partly reflects signs that imports into Europe and Japan, at around 400mt annually, have reached a plateau. That volume comprises about one-third of global seaborne coal trade, and is now vulnerable to downwards pressure. Among other buyers there are still clear signs of growth. India, in particular, is poised to become in 2015 the world’s biggest importer, possibly receiving about 250mt, amid a vigorous upwards trend. But China’s imports, since it rapidly became the largest importer two years ago with well over one-quarter of the world total, have abruptly fallen steeply, and weakness could continue. These changes together imply greatly reduced potential for future global coal trade advances.
Analysis, speculation, prognosis
What conclusions can be drawn about how patterns and volumes of seaborne energy commodity trade could evolve over the period immediately ahead? Several events in the recent past, discussed already, have clearly demonstrated one especially significant aspect. Whatever ‘sound’ analysis and ‘realistic’ expectations might suggest about the future outlook, unexpected changes will occur, possibly radically altering the previous prognosis, at least for the near-term outlook.
Nevertheless, some influences are likely to prevail, and will continue shaping ongoing trends. Further emphasis on energy-saving is one example of an established influence which probably will remain prominent. Even after recent reductions in prices for energy commodities, costs for most users remain substantial, frequently justifying steps to adopt more economical processes. Also, the implications of energy use for climate change and pollution can be expected to provide a continuing focus for modifying consumption volumes and sources. In many countries these underlying trends exert pressure for slower growth, no growth or perhaps reductions in energy commodity imports.
Looking at the immediate future, the next twelve months, global oil trade appears set to continue benefiting from prices much lower than seen up to the middle of last year. This view is based on an assumption that OPEC’s current stance persists. If instead their policy is reversed, perhaps resulting from political pressures as much as market economics, the trade outlook will alter. Similarly, a view of falling coal imports intoChina assumes slowing economic growth, coupled with a maintained prime political objective of reducing air pollution by switching to cleaner fuels. Those features also could change, or their impact on coal imports could be modified by other events in the energy market. Speculation is embedded, implying potential for further surprises.
