China's record coal imports this year will provide some support to freight rates but growing pressure from fleet oversupply is set to limit gains.

Net coal imports to China, the world's biggest coal producer, could soar 70-100 percent to 170 million tons or more in 2010, boosting coal prices globally, if the country's power use boom continues, according to exporters and analysts including the International Energy Agency.

Much of the coal is being transported in smaller panamax vessels, which have a capacity of around 60,000 and 80,000 deadweight tons (dwt). This helped average daily earnings for panamaxes rise this week to over the $35,000 level -- their highest since November last year.

"One of the main freight drivers has been this growth in coal exports to China," Martin Sommerseth Jaer, lead shipping analyst with Arctic Securities, said.

Panamax earnings have averaged around $29,900 a day so far this year from $19,300 a day in 2009.

Drought in south western China has also pushed up demand for coal in recent weeks leading to record high congestion levels at ports in major exporter Australia, already struggling with logistical problems.

"(China's coal demand) has also helped contribute to congestion on the east coast of Australia thereby cutting fleet supply and boosting freight rates," Derek Langston, a director with SSY Consultancy and Research, said.

China's coal appetite is also set to help tonne mile demand -- a key indicator of ship demand -- which measures the volume of cargo transported multiplied by the distance of the voyage.

"It's very beneficial for ton mile demand as you have the involvement of more long haul voyages to China such as Colombia and some South African coal," Langston said.

"The reduction in export availability of Chinese coal to buyers in Korea and Japan means there is another benefit ... as those buyers have to seek coal from further afield such as Indonesia and Australia."

Listed dry bulk shipping companies with panamaxes among their fleet such as Safe Bulkers , Golden Ocean group and Diana Shipping could also see gains.

"Dry bulk stocks with large panamax or supramax or handymax fleets are the most prone to benefit from this," Arctic Securities' Jaer said.

Fleet Growth
China's appetite for coal has also meant better sales for exporters from Colombia which is the longest route, which could also help benefit demand for coal capesizes, the largest class of dry bulk vessels with a capacity above 100,000 dwt.

But analysts say growing ship supply will put the brakes on rate gains.

"Over the next couple of years you need more coal trade to China and more coal imports to India to absorb the growing fleet," Jaer said.

"Even the most optimistic scenario on the demand side will likely not be able to bolster rates further as we believe the supply side is simply so overwhelming."

SSY estimated dry bulk net fleet growth rising to 63 million dwt this year from 38 million dwt in 2009.

"Robust Chinese thermal coal imports are expected to continue, even after the drought improves, but this incremental increase in dry bulk demand will not be enough to outpace the record level of new buildings continuing to be delivered," Jeffrey Landsberg, senior analyst with dry bulk consultants Commodore Research, said.

Panamax freight rates are currently around $27 per tonne on most major coal routes and could drop by up to $5 per tonne, but much will depend on how much ship tonnage gets absorbed, coal players said.

"It's very difficult to predict what will happen to freight rates," a major Indian importer said. "I'd like to think rates will come down later in the year but I can't be confident."

Consultants MSI estimated average panamax earnings could reach $24,000 a day by October.

Will Fray, shipping analyst with MSI, said coal imports could drop off once China's hydro power output returned to a proper operating capacity and local coal stocks, depleted by drought, were rebuilt.

"We expect earnings to be on average highe