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China’s electricity production surge is of great significance, according to Jeffrey Landsberg from Commodore Research.

China’s economy has been on a significant turnaround since the beginning of March. As the months have progressed, the turnaround has become even more clear. Electricity production has been showing a dramatic change in China and is just one example of the turnaround. Very encouraging for the dry bulk market are statistics showing China’s coal-derived electricity production in the last few months has been showing a huge shift from earlier this year (and also a huge shift from what was seen last year).

The truth remains that several pundits have been a bit oblivious to this year’s turnaround in China – but this has certainly been very helpful for those in the know, as it has created opportunities to profit in the dry bulk shipping market and commodity markets.  Both shipping rates and commodity prices have exceeded the extremely bearish expectations that many markets held at the beginning of this year.

At present, the dry bulk market has not been set to suddenly return to glory, but its longer-term prospects are also likely much better than consensus now believes, as well, as long as the Chinese economy continues to turn as it has been doing this year. Overall, we continue to believe strongly that China not getting adequate coverage of its positive developments will continue to create opportunities to profit in the shipping and commodity markets.  We also continue to believe that global economic research too often simply serves to advance a popular narrative, and in the case of China, the narrative of the Chinese economy remaining weak has simply been wrong this year.

Electricity production is one primary metric to use when gauging the actual strength of the Chinese economy, and in recent months electricity production has seen great strength. Chinese electricity production setting a new record this summer went largely unreported.

At the time of writing, the last three months (July, August, and September) have seen a dramatic shift in Chinese electricity production. China’s electricity production rose year-on-year by 8% in July, by 9% in August, and by 8% in September. Prior to July, China’s electricity production had risen each month this year by an average of only 2%. In addition, three out of the last four months of 2015 did not see any year-on-year growth in Chinese electricity production.

Regarding the dry bulk market specifically, what has been particularly noteworthy recently has been the great strength in Chinese thermal coal-derived electricity production. This strength has occurred due in large part from China’s overall economy strengthening and also from rainfall coming in recent months at lower levels than normal. The most recently released data shows that 361.2bn kilowatt hours of thermal coal-derived electricity production was produced in China in September. This marked a year-on-year jump of 46.6bn kilowatt hours (15%). This is also not only the largest year-on-year jump in Chinese thermal coal-derived electricity production seen this year, but also the largest growth seen since 2013.  n addition, it marks an extremely significant change from the first five months of this year, which saw four out of five months where Chinese thermal coal-derived electricity production contracted on a year-on-year basis.

Overall, the last three months have seen a steady increase in Chinese thermal coal-derived electricity production growth due in part to the strengthening of the economy and weakening in hydropower production. Strong growth is likely to be seen through the end of this year as well, and demand for thermal coal in China is likely to remain robust on the strength of peak winter season electricity demand.

The changes to China’s domestic coal production policy continue to make up much of what is in the news lately, but what also simply remains incredibly important is that China’s electricity production (and specifically its thermal coal-derived electricity production) has been a showing a dramatic change recently.  Overall, the Chinese economy has been in the midst of a significant turnaround that has been underway since the start of March – with recent months seeing the strengthening intensify – and China’s overall electricity production growth and thermal coal-derived electricity production growth have been increasing dramatically.

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