Overview
Dry bulk shippers specialize in transporting cargos, typically commodities, such as iron ore, coal, grain and other materials around the world. Companies with exposure to dry bulk include Diana Shipping, Inc., Eagle Bulk, Genco Shipping, Golden Ocean Group Ltd., Navios Maritime Holdings, Inc., Navios Maritime Partners L.P., Scorpio Bulkers, Safe Bulkers, Inc., Star Bulk Carriers Corp. and Ship Finance International Limited.
Solar energy gaining support:
With solar gaining in popularity one major commodity that could see a reduction in demand is coal. While it is emission heavy it had remained the least expensive way to generate electricity, leading many to disregard the costs to the global commons in exchange for cheap energy at home.
But this might no longer be the case. In fact, it has been reported that solar is now the cheapest form of new energy in nearly 60 countries. The implications are clear for the coal segment and should carry over to complimentary industries such as shipping, specifically the dry bulk segment.
Solar Trends:
2016 was a turning point for solar power generation as competitive auctions across the globe significantly lowered the price of electricity generated from photovoltaic panels.
Much of this came from developing economies which were once thought to likely pursue coal powered electricity generation as it historically represented the cheapest route for development. But in recent years emerging economies have outpaced OECD economies in terms of renewable energy capacity installed as cheaper prices, off-grid (or mini-grid) desirability, and clean energy policies have fostered growth.
But steep solar equipment cost declines, innovative business models, new entrepreneurs, better technology, improving economies of scale, and competitive auctions have led to unsubsidized solar becoming cheaper than coal in many regions with this trend set to continue into 2017 and beyond.
In March of 2016, a Mexican auction awarded solar contracts for $35.50 a megawatt-hour. This was followed by a May auction in Dubai which saw that contract price fall to $29.90 a megawatt-hour. Chile then set another record for $20.10 in August which was approximately half the price of coal power sold at the same event.
Source: Bloomberg
In 2017 Saudi Arabia, Jordan, and Mexico are planning auctions and tenders which could lower prices even further.
Several notable organizations are forecasting significant cost declines in the very near future. The U.S. Energy Department’s National Renewable Energy Lab expects costs of about $1.20 a watt now declining to $1 by 2020. Furthermore, the International Energy Agency expects utility-scale generation costs to fall by another 25 percent on average in the next five years. Finally, the International Renewable Energy Agency anticipates a further drop of 43 percent to 65 percent for solar costs by 2025. That would bring to 84 percent the cumulative decline since 2009.
While these recent auctions represent somewhat isolated cases, Bloomberg’s New Energy Finance has projected that within a decade solar (as well as wind) will both become more economical on average globally.
Source: Bloomberg
Dry Bulk Cargoes:
In terms of volume, coal is the second most important commodity transported by dry bulk vessels, with the first being iron ore.
In 2015 (the last year full annual figures are available) coal accounted for approximately 25% of global dry bulk cargo. The two types of coal typically transported are met or coking coal, which is typically used in the steel making trade and thermal or steam coal which is utilized for electricity generation.
Once again, in 2015 thermal coal accounted for approximately 78% of the coal shipped globally while coking coal represented approximately 22% of the trade.
Source: opensea.pro
Thus, any increase in the utilization of solar power to generate electricity at the expense of thermal coal will have a significant impact on dry bulk shipping across all classes of vessels, though some more than others.
Typically, the Capesize class is known for being the workhorse when it comes to coal delivery. According to Maritime Connector, 93% of all cargo for Capesize bulkers is comprised of iron ore and coal. In this class, approximately one third of the demand for these vessels comes from coal.
The Panamax class is also a major carrier due to either the short-haul nature of some routes or port restrictions in many key importing nations. For example, Australia’s (a major exporter) close proximity to key importing nations such as China, South Korea, and Japan lead some charterers to opt for Panamax vessels which have a significantly shorter load and discharge time.
Other exporters (such as Indonesia) do not have modern loading facilities in many key ports. Therefore it can take up to 10 times longer to load a non-geared ship utilizing floating cranes. Additionally, major importers like India also face similar discharge problems due to a lack of modern port facilities. Due to this condition, this specific route, Indo-India, has led to the greater utilization of the geared Supramax and Handymax class.
Beyond The Bottom Line:
Top coal consumers like China and India, number one and three respectively, and number one and two in terms of imports, respectively, are leading Asia in installing clean energy capacity. The recent severe smog outbreak in China this past December, and continuing into 2017, has renewed ambitions to continue this renewable trend and curtail emission heavy coal fired generation.
China’s take on pollution:
Source: International Business Times
Chinese policy makers are yet to arrive at a consensus on the major cause of air pollution, with various official bodies blaming vehicular emissions, winter heating systems, high humidity, temperature inversions, low winds, and construction work. However, one source of the pollution that is repeatedly mentioned is coal-fired electricity generation.
Following the latest outbreak in December, officials kicked off the new year by announcing that China aims to optimize the structure of its coal production by reducing out-dated capacity and increasing the use of cleaner products. The government intends to add over 20 million kilowatts of installed wind power and more than 15 million kilowatts of installed photovoltaic power by the end of the decade. Estimates for these green energy initiatives put that price tag at 2.5tn Yuan ($361bn) which would make China the largest investor in renewable energy.
India in the pollution fray:
Smog outbreaks aren’t just confined to China as India’s capital of New Delhi found out again this past November. Haze choked the city and residents experienced the worst conditions in recent memory. In fact, conditions on November 8th prompted CNN to declare that New Delhi is the most polluted city on earth right now, surpassing Mexico City, Los Angeles, and even Beijing with almost 10 times the amount of air pollution.
Source: CNN
But it’s not just New Delhi that is witnessing these conditions. According to the World Health Organisation, it (New Delhi) does indeed hold the title for the most polluted city, with an average annual PM 2.5 concentration of 150. However, three more Indian cities – Patna, Gwalior, and Raipur directly follow it in the rankings, while a further nine (Ahmedabad, Lucknow, Firozabad, Kanpur, Amritsar, Ludhiana, Allahabad, Agra, and Khanna) are among the top 20.
Source: Lions Ground News
These conditions have led to widespread protests among the citizens and calls for action from the government. It appears the government of India is listening and has made a declaration that 60% of its electricity capacity will be generated by renewable sources by 2027. The majority of that being solar and wind a close second. Authorities believe that this expansion of solar and wind power will help exceed Paris targets by almost half and negate the need for new coal-fired power stations going forward.
Shortcomings
Of course, these figures do not take into account certain shortcomings of solar and other renewable sources.
Bloomberg reports: “Coal industry officials point out that cost comparisons involving renewables don’t take into account the need to maintain backup supplies that can work when the sun doesn’t shine or wind doesn’t blow. When those other expenses are included, coal looks more economical, even around 2035, said Benjamin Sporton, chief executive officer of the World Coal Association.”
Considering the part time nature of electricity generation coupled with high storage costs from solar it becomes obvious that backup methods will still be required well into the future.
Therefore, an overnight shift of coal to solar doesn’t appear to be in the cards. However, over the long-run, it appears that renewables are poised to take market share from coal and as a result of this trend the coal industry, as well as dry bulk shippers, should feel the pinch.
Conclusion:
Steam or thermal coal accounted for nearly 20% of total dry bulk shipping demand in 2015. Significant changes are underway by several key consumers which are importers of this commodity. While we have seen a short-run resurgence in coal demand from key markets like China, the long-run is telling quite a different story.
Public pressure coupled with increasingly efficient renewable energy will create a significant shift in the global energy landscape over the coming years, with coal experiencing the greatest negative impact.
Unsubsidized solar power has made incredible gains and in many markets is now cheaper than coal fired electricity generation. But it’s not just solar creating this situation, coal is under attack from multiple sides as wind and a greater availability of cheap natural gas look to also eat away at market share.
Shippers have little control over the demand side equation. What they can control is the supply of vessels available to meet the demand. Going forward dry bulk owners will need to exercise restraint in the fleet building as a key commodity which previous growth was based upon begins to fall out of favour.
Summary:
Solar power is gaining in popularity and it’s not just subsidies or government mandates driving this change.
Solar power has become increasingly cost effective as every part of the supply chain has cut costs to become more efficient and technology to harness energy has improved.
This shift could impact the dry bulk industry in a very negative way.
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Source: Value Investor’s Edge, Seeking Alpha
