Sep 4, 2022
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How Russia survives the coal embargo

While the EU is closing factories and raising prices for the population, Russian coal miners have been looking for new markets. It was not difficult to find them, but they still failed to completely redirect European volumes to Asian markets. The decline in exports to Russian coal miners is not as easy as the decline in gas exports to Gazprom. How will coal miners survive temporary difficulties due to the European embargo?

On August 10, the EU embargo on the supply of Russian coal came into force. While the Europeans are shutting down factories and driving up household bills for electricity in an attempt to cope with the energy crisis, Russia is trying to redirect European supplies to new markets. We did this, of course, not on August 10, but earlier.

According to the Energy Development Center and Kpler, Russian coal producers have found a replacement for the European Union and redirected supplies to China and India. Deliveries of coal to these countries in July compared to June increased by 42% and 60%, respectively. In particular, 6.7 million tons were delivered to China by sea, and 2 million tons to India. BloombergNEF analysts also point out that Russian coal has found new buyers in Turkey and Africa.

However, Russia has not yet succeeded in completely redirecting European flows to other markets. In addition, as in the case of oil, Russian coal has to be sold at a discount. What does this mean for the Russian coal industry?

“On the part of China and India, the interest in Russian coal is really great. Russian coal now feels good in China, unlike the same Indonesian coal. But it is not possible to rebuild all supply chains so quickly. Therefore, situationally, we can see a drop in production,” says Sergey Kondratyev, deputy head of the economic department of the Institute of Energy and Finance.

Judging by Russian Railways’ operational data for August, coal loading continued to fall. The decrease amounted to 5.7% in annual terms against 5.5% in July, says Igor Chernov, director of corporate ratings at the Expert RA agency.

Along the way, Russia needs to solve emerging problems with insurance and freight. The EU not only imposed a ban on the purchase of Russian coal, but also banned European companies from insuring any ships carrying Russian coal.

However, there are options for solving the problem with insurance, Chernov is sure. “For example, these may not be European companies that previously dominated the insurance market for such cargoes, but Chinese, Turkish or Indian ones. As a last resort, Russian companies can insure some deliveries with reinsurance in RNPC (Russian National Reinsurance Company), which may require additional additional capitalization,” Chernov argues.

So far, it has not been possible to fully compensate for supplies to Europe, but this is a matter of time, the expert is sure. Gradually, Russia will cope with this task.

First, Russian companies actively provide discounts.

“Russia gives a very good discount to developing countries that have found themselves in a very difficult situation due to rising energy prices, for example, Pakistan, Bangladesh, India and other countries of Southeast Asia. Coal left the world market for Europe, and it became more difficult for poor countries to find the necessary volumes at the prices they could afford. They are afraid of a situation like the one that happened in Sri Lanka,” says Sergei Kondratiev. Sri Lanka is experiencing its worst economic crisis since independence in 1948. There was a shortage of fuel, food and medicine in the country.

The price is the first important advantage of Russian coal. Another indisputable advantage is its high quality (ash content and calorie content). For example, says Kondratiev, coal from East Asia may contain soil, and Poland, which was the first in Europe to abandon Russian coal, faced the fact that imported coal (and Polish coal too) contained bolts and other details, which became lead to frequent shutdowns of coal-fired power plants. In winter, such stops are a serious risk of emergencies.

Finally, Europe is not the main consumer of coal in the world: there are Asian countries that can easily absorb our volumes. “Coal consumption in Europe last year amounted to 6% of global demand, while coal consumption in China was 54%, and in India – 12%. Therefore, there is certainly a potential for increasing coal supplies to the Asia-Pacific countries, especially against the backdrop of the current energy crisis in the world,” says Tamara Safonova, Associate Professor of the Faculty of Marketing and International Cooperation of the Institute of Management and Regional Development of the RANEPA.

But the redirection of supplies will take not several months, but several quarters.

“For us, this will not be a rollback of five or ten years ago, but a maximum of one or two years. At the same time, our coal exports have increased dramatically in recent years. Therefore, Europe’s refusal of our coal will not mean some deplorable situation for us, ”says the deputy head of the economic department of the Institute of Energy and Finance.

This season, Russia is helped by a three-fold increase in world prices – above $400 per ton. And this can compensate for both the decline in exports and the need to sell coal at a discount.

In general, the decline in coal exports will be low – less than 10%. “On the other hand, volumes are important for coal miners. It is Gazprom that can afford sharp fluctuations in exports, and there are many exporters on the coal market with small production volumes and exports of only a few million tons. For them, a decrease in production by 5-10% can be sensitive. Therefore, coal miners are often ready to give up part of the margin in order to maintain their market share in the market,” explains Kondratiev.

But this year, it is likely that high prices will compensate for everything – increased transportation costs, discounts, the ruble exchange rate, and falling export volumes. Coal miners can still make good money this year.

With such high prices for thermal coal, a 5-7% decrease in export volumes is not a big problem, even taking into account the discount,

Chernov says. According to the Energy Development Center, the cost of exporting Russian coal, taking into account the discount, can be $200 per ton, while regional benchmarks reach more than $400. That is, Russian coal can be sold at a discount of 45-50%. But for comparison: last year coal cost an average of $150 per ton. That is, now Russia sells coal more expensive than last year, even taking into account the discount.

“Given the successful first half of 2022, at the end of the year we can expect that financial results will at least not be lower than last year, and most likely will be higher. At the same time, 2021 was one of the most successful financially,” notes Igor Chernov. In addition, if the ruble depreciates somewhat in the second half of the year, this will allow even higher financial results to be shown in rubles, he adds.

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