As Russia’s invasion of Ukraine enters its second month, it is severely hurting global economies recovering from the pandemic-related distress. In continuation of our Ukraine-Russia series, after exhibiting grain and ferrous metal trade impacts in the last couple of weeks, we will now examine the potential shifts in coal trade flows this week. In 2021, Russia produced 440 mln mt of coal, of which 48%, or 210 mln mt was exported. Meanwhile, Ukrainian coal exports were insignificant to take into consideration.
What’s the latest?
This month, the president of the EU commission announced, “We must become independent from Russian oil, coal, and gas. We simply cannot rely on a supplier who explicitly threatens us”. The situation turned messy after the US and EU announced (few) sanctions against Russia. Although coal is not part of any sanctions yet, it is at the forefront as one of the most traded commodities in the dry bulk segment.
Russian Coal Export:
Russia remained the 3rd largest coal exporter in the seaborne market, accounting for 17% (180 mln mt) of thermal coal exports and about 10% (30 mln mt) of coking coal exports in 2021. Of the 180 mln mt of thermal coal exported, Europe accounted for 65 mln mt, Japan and South Korea cumulatively bought 37 mln mt, while China bought 40 mln mt. Of the 30 mln mt of coking coal exports, China accounted for about 11 mln mt, followed by 10 mln mt to Japan and South Korea, and about 5 mln mt to Europe and India respectively. Europe has a greater dependence for thermal coal while Asia has been relying on both – thermal coal and coking coal out of Russia. Therefore, these markets are most likely to feel the heat of a potential coal supply disruption. Let us evaluate, how? Given widespread uncertainty followed by announced sanctions, coal importing countries have been taking an extra cautious approach. Some coal exporting majors have announced force majeure while some traders have reportedly resold to other destinations as a result of payment difficulties.
EUROPE:
Thermal coal
The crisis has left the European energy market in crisis, now largely reliant on dirty brown coal to keep the lights on. Reportedly, Poland was in talks with Australia, South Africa, and Colombia to replace the Russian coal imports, Italy’s Prime Minister has suggested reviving coal-fired power plants in fear of supplies disruption of Russian Gas. Meanwhile, Germany is mulling an extension of the coal phase-out period, days after it suspended certification of a pipeline that would have doubled the volume of gas it imports directly from Russia. Interestingly, German Foreign Minister Baerbock, on 8 March said that Germany opposes sanctions on Russian energy and will not stop importing energy from Russia. Likewise, many EU countries are not in favour of sanctions on Russian energy acknowledging that this is not viable immediately. Meanwhile, European energy demand can be met by coal as a ‘cheapest’ alternative, supporting seaborne freight rates. Record gas prices of over $1000/mt are keeping coal-fired plants costcompetitive even at the latest coal prices levels close to $250/mt.
Coking coal
Market sources suggest European steel mills are turning to Australia as an alternative to Russian coking coal. However, recent heavy rains have seriously affected Australian port operations, resulting in supply shortages. Meanwhile, coking coal shipments from the US to Europe have increased. While the arrangement appears promising in the long run, purchases are expected to remain rangebound in the short run amid high coal prices.
CHINA:
Thermal coal
Beijing’s unofficial ban on Australian coal has turned to be lucrative for Russian coal exporters. However, the relatively sufficient domestic coal supplies (686.6 mln mt for the first two months, a Y-o-Y increase of 10.3%) combined with a surge in global coal prices have kept the Chinese buyers in the parking bay. Reportedly, many Chinese coal importers and Russian miners met earlier this month to discuss boosting trade and discussed the possibility of using a Yuan-based cross-border payment system, and issues related to transportation capacity. Consequently, few coal cargoes were heard heading into the Chinese market from Russian ports from the last week onwards. Although the Russian Energy Ministry expects to increase exports to China by 10 mln mt this year and to reach 100 mln mt in 5 years’ timeRussian coal to the Far East is not expected to surge significantly in the short term until a railway system upgrade allows Russia to carry more coal to its eastern ports.
Coking Coal:
Coking coal inventories at major steel mills in China dropped significantly from 3 mln mt to 1.8 mln mt during the past few weeks, hitting a new low since mid-September last year. Despite a low inventory in some steel mills, Chinese buyers are not willing to enter the market at least in the short run until the steelmaking profit recovers. Over the long run, China is expected to compensate for the lost quantity from the last year from Mongolia. In 2021, China imported merely 14.6 mln mt of coking coal against 36.7 mln mt pre-epidemic levels from Mongolia due to the epidemic, a Y-o-Y decrease of 46.5%
INDIA:
Thermal Coal:
The world’s second-largest coal consumer is also ramping up domestic production to cut its reliance on imports. Considering the rise in domestic output, coal imports are estimated to remain under pressure as coal buyers preferred replacing costlier imported coal with cheaper domestic coal. However, earlier this month, India caused quite a stir with its willingness to purchase coal at discounted rates from Russia. At the time of writing, India and Russia have agreed upon a direct rupee-rouble trade mechanism that will sidestep western sanctions. This will be an interesting turning point as India is already receiving discounted coal from Australia following the Chinese import ban on Australian coal which has backed out Indonesian volumes. Should India increase purchases of discounted Russian coal substantially, the new trade pattern will change considerably. If Russian supplies were to be shipped to India from ports in the western parts of the country, e.g., Ust-Luga or Murmansk, there would be a considerable increase in the tonne-mile demand.
Coking Coal:
Indian steel companies import nearly 80% (or about 55 mln mt) of their coking coal requirement due to domestic unavailability. India’s traditional supplier - Australia has recently hiked coking coal prices to $700/tonne from $200/tonne earlier this year, weighing heavily on the input costs of steel mills. With an intention to reduce its dependency on Australian supplies, the Indian steel Ministry has announced that the country will continue importing coking coal from Russia in line with the trade deal between the two, taking an advantage of the discounted rate and the new payment mechanism.
Supply Scenario:
Shortcomings in coal supply have already prompted some unusual trade developments. For example, Australian, South African and US steam coal cargoes destined for India reportedly been re-sold into Europe. Meanwhile, European buyers have also shown an increasing interest in Australia, Indonesia, and South African supplies to replace Russian coal. Although Indonesian miners are cashing on the opportunities on the back of lucrative earnings, weather-related disruption followed by export restrictions in Indonesia to address domestic shortages would limit the total export volumes. However, such backhaul trades would represent a significant tonne-mile increase. Other leading producers, including Australia and South Africa, are already experiencing increased demand from both the Asian and European markets, far outstripping available supply. The countries are already producing at their maximum capacity. Any expectations of delivering more to the spot market would hinder miners’ annual coal contracts as they already face difficulties due to a combination of rail capacity issues, maintenance outages, weather conditions, and Covid-related labour shortages. Between all these uncertainties, China and India have chosen to maintain their commercial ties with Russia. Consequently, the Russian commodity exchanges in these two major economies are likely to continue at least in the medium to long run.
Coal Price:
Another factor beyond the Russia-Ukraine conflict that is driving coal prices is the La Nina weather phenomenon, which is expected to continue for another couple of months at least, has been holding back output in Indonesia, Australia, and South Africa. With any further escalation of the prevailing geopolitical situation, seaborne coal supplies could get disrupted more than anticipated, leading to prices remaining highly elevated throughout the year. Having said so, fear of pricedriven demand destruction is expected from pricesensitive buyers like India.
Summary:
Although Russian coal production and exports are not being sanctioned directly, global economies are scrambling to source alternative supplies due to uncertainty over what the future will bring. Even with elevated coal prices, other producing nations are unlikely to fully compensate for the potential loss of some Russian supplies, in turn, supporting coal prices. Moreover, buyers’ concerns are hovering around financial restrictions, delivery uncertainties, and extra insurance premiums. The crisis illustrates the quick shift from gas to coal-fired power generation in the short run. Although precise shifts in trade flows are difficult to predict, Atlantic Russian coal exports to Asian markets, and Europe paying for longer-haul imports for South African and Australian coal, boosting coal trade in tonne-mile are more likely to develop across the short to medium term.