Column by the head of the analytical research department of Alfa-Bank Boris Krasnozhenov about the prices for thermal coal

In the second quarter, a rather difficult situation developed on the thermal coal market. The price of coal with a calorific value of 6,000 kcal in the Atlantic basin in June fell to $99–108 per ton. The cost of Russian coal of similar grades fell below $80 per ton in the port of Taman and $70 per ton in the ports of the Baltic Sea. There are three main reasons for such dynamics – the large stocks of solid fuels in Europe, the decline in gas prices, which fell below $300 per 1,000 cubic meters, and the reduction in electricity production (in June, generation fell by 8.5% yoy).

The price of thermal coal in Asian markets also declined in the second quarter of 2023, although maintaining a traditional premium to Atlantic benchmarks. Prices for coal with a calorific value of 6,000 kcal have tested the bottom at $120-125 per ton. At the same time, the demand for Russian thermal coal in the ports of the Far East was quite strong: according to Argus, Russian exporters sold out all coal volumes with delivery in July-August.

I believe that thermal coal prices may be close to the turning point. There are a number of tactical factors and strategic aspects that support prices. On the tactical side, demand for steam coal in China remains strong, as the number of days with high temperatures (over 35°C) has almost doubled the average of previous years. We are seeing more and more forecasts of hot and dry weather in Asia during the summer season. There have been problems with rail transportation in South Africa, due to which, in June alone, there is a shortage of 300,000 tons of thermal coal. At the same time, gas prices in Europe have now stabilized.

From a strategic perspective, demand for thermal coal remains strong in the long term. In September 2022, the Chinese authorities confirmed the start of construction of new coal-fired thermal power plants with a total installed capacity of 165 GW. Given certain logistical restrictions on the transportation of coal within China, the country will continue to import high-calorific thermal coal. At the same time, in 2022 Russia became the second largest exporter of coal to China after Indonesia, and against the background of a shortage of coal in the ports of the Far East, Chinese importers switched to its purchase from the western direction: Argus in June marked a contract for the supply of coal from the port of Taman to China by $112 per ton on a CFR basis.

In addition to China, Russian coal was able to take a significant share in the Indian market in 2022 thanks to a surge in world prices and the use of discounts. Russian exporters are still finding new markets in Asia: for example, shipments to Sri Lanka reached 350 thousand tons in April 2023, showing a three-fold increase in annual terms. Other Asian countries – Thailand, Malaysia and Vietnam – can also increase supplies from Russia against the backdrop of a shortage in the supply of high-quality thermal coal with a high calorific value.

We expect steam coal prices to improve in the second half of the year, while we see significant potential for Russian exporters to increase supplies to Asian markets. We can also expect a recovery in demand for thermal coal in European markets if gas prices start to rise as we approach the start of the heating season.

Boris Krasnozhenov, Head of Analytical Research at Alfa-Bank