the industry will have to get used to low prices again

Russian coal companies face the prospect of production cuts this year as prices fall this spring to April-May 2021 levels. Coal exports are becoming unprofitable due to rising logistics costs, import duties from China and exchange rate export duties imposed by the Russian authorities. Although companies hope that global coal prices will strengthen in the summer amid demand for electricity for air conditioning, analysts do not yet see clear preconditions for this.

World coal prices, against the backdrop of an extremely warm winter in the Northern Hemisphere, dropped to spring 2021 levels by early April. In March, thermal coal on the FOB Vostochny basis fell to $89.7 per ton against $120 in March 2023 and $162 in March 2022.

Prices are still significantly higher than in 2020, when they dipped below $70 per ton. However, coal exports from Russia still crept down. Sea shipments in the first quarter amounted to 33 million tons, which is 21% lower than the same period last year and 11% lower than the fourth quarter of 2023, according to Kpler data. The main reason is low export prices for coal combined with rising costs for Russian coal companies.

The largest producer of thermal coal in Russia, SUEK, explains the decline in prices due to seasonality and a warm winter. “The period of peak winter consumption has passed, and the summer increase in demand associated with increased electricity consumption for air conditioning has not yet arrived. In addition, trading activity is limited by the high level of fuel reserves remaining in warehouses after a relatively warm winter,” the company told Kommersant. They expect demand for thermal coal to remain high over the annual horizon, especially in Asia. “By the end of 2024, we expect an increase in coal imports in China, South Korea, Japan, the Philippines, Thailand, Vietnam and a number of countries in South Asia,” SUEK said.

However, the authorities of the coal regions are signaling problems. Chairman of the Supreme Council of Khakassia Sergei Sokol said that coal mining enterprises in the region are sending employees on forced leave due to a decrease in production volumes. “Due to problems with export quotas and railway tariffs, almost all open-pit mines are operating at half their capacity,” he wrote in his Telegram channel. According to him, coal companies when exporting Khakass coal through the western ports of the Russian Federation incur losses from 0.4 thousand to 1.5 thousand rubles. per ton. “Given the falling prices and restrictions on western travel, the only alternatives remain India and China. But due to transport and logistics difficulties (Khakassian coal is imported to Southeast Asia, including via the Northern Sea Route), 2/3 of the final cost of coal is transport costs,” noted Sergei Sokol.

In his opinion, taking into account the seasonal reduction in demand for coal and the period of summer track repair work on the Russian Railways network, “the prospects until the end of 2024 do not give reasons for optimism.”

Coal in a streak of bad luck

All market participants recognize that the main factor affecting the profitability of companies compared to the spring of 2021 is the sharply increased logistics costs (see also interview). On average, Russian Railways tariffs for thermal coal increased by 22% over the year, taking into account indexation in December 2023 and the extension of the abolition of distance discounts. Gondola rental rates, although down in March, are still 44.3% higher than a year ago, according to Neft Research.

In these conditions, coal companies are trying to get discounts on coal transshipment at ports, since this is the only part of logistics costs that they can now influence. According to market participants, the average transshipment rate in Ust-Luga decreased in March by more than 17% month-on-month, averaging $19 per ton, in the port of Vostochny it decreased by more than 7%, to $20.8 per ton.

The loudest conflict occurred around transshipment through the OTEKO terminal in Taman – in February, coal companies stopped shipments there, citing too high transshipment prices. JSC Russian Railways estimated loading losses for two months at 6 million tons, which forced the government to intervene in the process. According to Kommersant’s sources, at one of the meetings, First Deputy Prime Minister Andrei Belousov strongly recommended that OTEKO owner Michel Litvak ensure transshipment. Then the terminal’s press service reported that they had met the coal companies halfway by reducing tariffs. According to Argus, at the end of March Raspadskaya, which produces more expensive coking coals, resumed shipments through Taman. Several more producers from Kuzbass and Khakassia plan to resume exports through the terminal.

Exit and entry fees

In 2024, duties became an additional burden for coal companies. Thus, China has returned the import duty on Russian coal in the amount of 3–6% depending on the type of coal, which forces exporters to reduce prices. “China is the largest and one of the most important markets for coal from the Russian Federation,” SUEK told Kommersant. “At the same time, Russian suppliers are in unequal competition with exporters from Australia and Indonesia, whose coal is not subject to import duties due to free trade agreements.” trade.”

To compensate for the effect of Chinese duties, the Russian government decided to cancel the export exchange rate duties on coal introduced in 2023. However, the Ministry of Finance did not want to lose the budgeted revenues and was going to compensate for the abolition of duties by increasing the mineral extraction tax. It was not possible to agree on an increase in the mineral extraction tax, and as a result, export duties of 4–7% were returned.

Sanctions waves

Until recently, the most sensitive type of sanctions against the coal sector was the EU embargo, which came into force in August 2022. Then companies had to redirect more than 60 million tons of exports to Asia.

In 2024, Western countries switched to targeted attacks – SUEK and Mechel were included in the SDN List. According to estimates by the Chinese Coal Transportation and Distribution Association, sanctions could affect a fifth of coal exports from the Russian Federation.

Inclusion in the SDN List means that the assets of companies are blocked, and American citizens are prohibited from interacting in any way with the people and companies listed on it. Since American sanctions have a secondary effect, they make payments extremely difficult – large banks do not want to risk being cut off from the dollar financial system.

In particular, tightening sanctions have already had a negative impact on coal supplies to South Korea. According to Kpler, South Korea imported 857 thousand tons of Russian coal by sea in March, which is the minimum volume over the past four years. South Korean utilities replaced Russian coal with increased imports from South Africa and Colombia. South Korea’s imports from Russia were relatively stable in 2023, rising 1% to 26.8 million tonnes.

Sanctions for violating the restrictions imposed on persons included in the SDN List can be imposed on South Korean counterparties, banks, port operators, stevedores, transport companies and even sea and river vessels, which makes them “toxic,” explains the director of the expert group Veta Dmitry Zharsky. “That is, any interaction with them, their maintenance and use will also create sanctions risks,” the lawyer comments.

Industry interlocutors of Kommersant believe that the consequences of sanctions for companies will be increased discounts on sold coal, as well as difficulties with chartering and insuring ships. The interlocutors also expect a reduction in coal purchases by unfriendly Asian countries, including Japan and Taiwan.

It’s more expensive to earn for yourself

The Ministry of Energy expects that in 2024, coal production in Russia will amount to 443.5 million tons, taking into account the DPR and LPR, which will be taken into account in statistics from this year. In 2023, production was at 438.7 million tons, excluding new regions.

The chief strategist of the investment company Vector X, Maxim Khudalov, says that with a high degree of probability, the more expensive mine production of coal grades D and G will decrease. “Market conditions, high rates of coal shipment in ports, temporary abolition of the reduction factor for coal transportation and export duties “These are the four horsemen of the coal apocalypse,” says the analyst. “Based on the results of the first quarter, we are already seeing a decline in coal transportation of almost 5 million tons.”

Coal companies are limited in their response options. It will not be possible to reduce the cost of production, since today it is already approaching 4 thousand rubles. per ton. Closing the most inefficient mines will reduce production costs by no more than 5–7%. Maxim Khudalov believes that, most likely, companies will freeze investments. “The main thing now is to hold out for this year and a half and prevent the mothballing of promising longwalls at our mines, so coal miners must actively work with creditors, offering them favorable terms for debt restructuring,” he believes.

A reduction in production from thermal coal producers is quite possible, says Evgeny Grachev, director of the Center for Price Indexes. He recalls that companies strive to maintain production volumes until the end, since a decrease, as a rule, leads to an increase in unit costs. However, he continues, “without a decrease in coal supply and a seasonal recovery in demand in the summer, we do not see factors that could support prices.”

Evgeniy Zainullin