The West predicted problems after the embargo on Russian coal
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Exports will simply turn to the East
On August 1, a complete embargo on the supply of Russian coal to the European Union began to operate. This measure is part of the fifth EU sanctions package adopted by the alliance back in April. Obviously, both parties will bear the costs – both consumers in the Old World and exporters in the Russian Federation. Both will have to rebuild logistics, reorient themselves to alternative markets, and put up with inconveniences. Who will be worse in the end – we will learn about this over time.
According to the official wording of the EU, the measure includes “a ban on the purchase, import or transfer of coal and other fossil fuels to the EU if they originate in Russia or are exported from Russia, starting from August 2022.” According to the Ministry of Energy of the Russian Federation, last year the share of EU countries in the total export of Russian coal amounted to 21.8% – this is 48.7 million tons, purchased in the amount of $ 8.7 billion. Moreover, this was mainly thermal coal used in electricity generation. It should not be confused with metallurgical (or coking) coal, which is used to make coke for the steel industry.
According to government officials, the products of Russian coal companies will certainly find new markets. In particular, in the Asia-Pacific region, where the goods will be delivered through underloaded seaports. According to Deputy Prime Minister Alexander Novak, there are such opportunities, it all depends on logistics and cost. Russia has free port facilities in the Black and Baltic Seas, Novak said.
Meanwhile, having introduced a coal embargo and set a course for a gradual phase-out of Russian gas, the Europeans have begun to think about how they can dramatically increase the use of coal in the electric power industry. Thus, France announced the restart of the coal-fired power plant “Saint-Avold” in the north-east of the country. Own production in the EU amounted to 328 million tons in 2021, including 316 million tons of thermal coal. And consumption is 435 million tons (including 380 million tons of thermal coal). In order to replace Russian imports, Brussels will have to negotiate new terms with potential suppliers – the United States, Canada, Australia, Indonesia, South Africa, Colombia, and even, not excluded, Mongolia. Accordingly, the transport arm will be much longer, and the issue price will be higher.
On world markets, coal continues to rise in price, being in the same uptrend with other energy carriers. On August 1, Newcastle coal futures traded at $407 per ton, while a year ago they were $84. According to Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation, Europeans will have to pay more than $400 per ton of imported coal. Russia would sell it to them for $200-300.
“The EU countries will not be left without coal, but they will face costs,” says TeleTrade analyst Alexei Fedorov. – In December last year, a ton of thermal coal cost $150 per ton, today it is completely different money. And taking into account the reorientation to alternative suppliers (primarily Australia and the United States), the alliance will face logistical difficulties, and this is an additional 10-15% to the total amount. The main burden will fall on Germany, France, Italy, Poland, the Netherlands, which bought the largest amount of coal from us.”
Fortunately for Russia itself, the balance of the global coal market is neutral. That is, demand matches supply. Domestic coal will go to Asia, mainly to China and India. As Fedorov recalls, at the beginning of 2022, Moscow was negotiating with both countries on a significant increase in the volume of deliveries, in the case of Beijing, from 50 million tons to 100 million tons per year. It is also likely that serious financial losses from the embargo will be avoided thanks to current coal prices and a favorable first half of 2022: Russia increased exports in physical terms by 4% compared to last year. The further situation, according to Fedorov, will depend on the global situation, as well as on the logistics capabilities of the Russian Federation to redirect supplies. If prices stay above $300 per ton until the end of the year, then producers will be able to maintain financial and operational results at the level of 2021.
“In Europe, the embargo will hit, first of all, Germany, Poland and Italy – the largest consumers of Russian coal,” says BitRiver financial analyst Vladislav Antonov. “Given that a harsh winter is expected on the continent, this raw material is in high demand there. As for Russia, the European ban will affect its coal industry: exporting companies will feel a drawdown in revenue. However, they will redirect their products to the East – to China, India and Turkey.
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Coal exports will turn to the east
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