Coal road to the east – Newspaper Kommersant No. 172 (7373) of 09/19/2022

The risk of the most negative scenarios for the development of tension in the Asia-Pacific region (APR), up to the armed conflict around Taiwan, should not become an obstacle to expanding the infrastructure to increase the export of Russian coal, according to the Institute for Natural Monopoly Problems (IPEM). According to the Institute, even in a crisis scenario, coal prices in the Asia-Pacific region will significantly exceed the costs of Russian producers.

Export prices for Russian coal in the Asia-Pacific market will cover the costs of mining companies even in the most unfavorable scenarios for the development of the situation in this region on the horizon until 2035. IPEM came to this conclusion, believing that the export of Russian coal to Asia would be constrained not by demand, but by logistical capabilities.

“The expansion of the Eastern polygon and the development of port facilities force us to look for an answer to the question of the prospects for Asia-Pacific coal markets for at least the next 10-15 years,” the IPEM note says (Kommersant has it). “The prospect of building ghost ports or idle railway junctions and lines is frightening for all participants – business, the state – especially since world history contains examples of such miscalculations.

The policy note contains three scenarios. The Current Trends scenario, which is considered the most likely, assumes continued moderate economic growth in China, strong economic growth in India, Vietnam, Thailand, and moderate economic growth in Japan and South Korea. Only the last two countries will achieve stabilization of coal consumption by 2030, in the rest of the region, demand will grow. IPEM expects China to maintain import restrictions on Australian coals with a gradual increase in replacement supplies from Australia to Europe. Indonesia will gradually reduce supplies to the Asia-Pacific region.

Also in the Asian markets, there will be an increase in the role of the United States, an increase in the supply of Colombia and South Africa to European countries to the detriment of the Asia-Pacific region. In terms of supply, Russia’s supplies will be at the maximum level. In this scenario, IPEM expects coal prices in the Asia-Pacific region to rise gradually to $158 per tonne by 2030 (the indicator is based on Australian coal FOB Newcastle 6,300 kilocalories), and then decline to $116.7 per tonne by 2035.

At the same time, the cost (price to achieve zero profit) of Russian coal exports is estimated in all scenarios at $68 per ton in 2025, $66.3 in 2030 and $82 in 2035.

The second scenario, Outstripping Growth, assumes higher economic growth rates in the Asia-Pacific region than in the first scenario, which will lead to an increase in average coal prices to $174.5 in 2025, $183 in 2030 and $171.5 in 2035. It is also expected that Western banks will impose less stringent requirements for the financing of mining projects. Russia’s deliveries in this scenario are expected to be at the maximum level.

Finally, IPEM is considering a crisis scenario involving an armed conflict over Taiwan. Specialized foreign analytical centers, IPEM writes, expect the conflict to start in 2027. According to IPEM, as a result of the conflict, a sharp reduction in demand for coal from Asian countries after 2027 is likely, while China may completely stop buying coal from Australia.

Russia, as IPEM expects, will continue to deliver supplies to the Asia-Pacific region at the maximum level, since although prices in this scenario will be lower ($132, $136 and $101 in 2025-2035, respectively), they will still be significantly higher than the costs of Russian producers.

Positive assessments of the thermal coal market are also shared by Fitch Ratings analysts. The agency lowered estimates for the cost of iron ore, non-ferrous metals and coking coal until 2025, but raised the forecast for thermal coal.

The coal market is benefiting from strong demand, including from China, and rising energy prices, especially in Europe, leading to increased reliance on coal-based energy production, according to Fitch. If the old forecast for thermal coal prices in China for 2025 was $90 per ton, then the new one is $93. Fitch raised its forecast for this year to $176 per ton instead of $162.

Evgeny Zainullin