Coal has frozen discount – Newspaper Kommersant No. 208 (7409) of 11/10/2022

With winter approaching, Russian coal miners were able to sell thermal coal for export at a lower discount than the one that developed after the outbreak of hostilities in Ukraine and the imposition of sanctions. The reduction in production in China helped, as well as the growth in demand in India due to the displacement of Australian coal. Nevertheless, analysts do not have a unanimous opinion on the future direction of coal prices, and no one on the market is counting on a complete rejection of discounts on Russian coal.

The discounts at which Russian thermal coal is now traded against world benchmarks began to decline in October for the first time since the outbreak of hostilities in Ukraine. According to Gazprombank’s Center for Economic Forecasting (CEP GPB), export prices for thermal coal increased by an average of 7% in October.

The largest increase in average prices occurred in the segment of coal 5500 kcal. On a monthly basis, this coal has risen in price by 15%, to $168 per tonne, on an FOB Vostochny basis. Thermal coal 6,000 kcal at FOB Vostochny and FOB Taman rose 6% to $185 and $123 per ton, respectively. Prices for coal of the same calorific value at FOB Baltika remained unchanged at $106.

The reduction in discounts is connected with the strengthening of Russia’s market positions in Asia: exporters are less and less willing to give in to requests for discounts, as a result of which the gap from benchmarks is shrinking. Thus, on the eve of the 20th National Congress of the Communist Party of China, control over the safety of coal mining in the country was strengthened. This led to a reduction in production in the domestic market of China and created the conditions for an increase in coal prices in October on a CFR basis Chinese ports.

India, which has emerged as one of the biggest buyers of Russian coal this year amid sanctions, is choosing Russian grades because they burn less ash than comparable Australian coal, which is also more expensive. The dynamics of quotations in ports, writes CEP, is also affected by the movement to the Far East of part of the ships that previously served export flows in the Baltic.

According to the latest data from the Ministry of Energy, in the first seven months of 2022, the drop in coal exports amounted to 8.6%, but was largely offset by increased demand in the domestic market. During REW-2022, Deputy Minister of Energy Sergey Mochalnikov stated that due to the EU embargo and the cessation of supplies to Ukraine, Russia needs to look for markets for about a third of all coal exports, which amounted to 223 million tons in 2021 with a production of 438.4 million tons . First Deputy Prime Minister Andrei Belousov said in October that the discount on Russian coal exports was as high as 60%, but even under such conditions, in his opinion, Russian coal companies remain profitable.

Market participants and experts, writes CEP, do not have a single point of view on the dynamics of coal prices in November-December. On the one hand, high demand for energy coal and limited supply speak in favor of cutting discounts. On the other hand, the growth of coal production in China may lead to a price correction in Asian markets. The REA Analytical Center of the Ministry of Energy expects that the discount will continue to decrease in the first quarter of 2023.

According to Sergey Grishunin from NRA, in November-December, coal prices will rise against the backdrop of seasonal demand. The situation next year, in his opinion, will depend on the monetary policy of major central banks. If they continue to raise the key rate, then the reduction in economic growth will lead to a fall in coal prices. The second scenario assumes a reversal of the policy of central banks, which may lead to higher inflation and higher prices for raw materials, including coal. At the same time, Sergei Grishunin believes that discounts on Russian coal will not completely disappear in any case.

Evgeny Zainullin