Western sanctions have changed the export flows of national coal companies

Russian miners celebrate their professional holiday, which is celebrated this year on August 28, in a great mood. It was not spoiled by the embargo imposed by Britain and the EU countries on the import of Russian coal, which caused an imbalance in the market and, accordingly, an increase in prices. Domestic coal miners were able to quickly reorient export flows from West to East and increase supplies abroad in the first half of the year.

Winds of change

This year, the situation in the domestic coal industry was influenced by several factors at once. First, geopolitics has had its say. An embargo on the supply of Russian coal was introduced by Poland and Britain. Since August 1, all EU countries have joined them. Before the sanctions, the Russian Federation accounted for 65% of imports to the European Union. Domestic coal companies were forced to redirect their export shipments to friendly jurisdictions. First of all, to India, China and Turkey. The countries of the Asia-Pacific region and the Middle East also became important destinations.

Secondly, this summer the demand for energy resources was spurred on by abnormal heat in Europe and China, historically Russia’s largest sales markets. Due to the high temperature, nuclear power plant reactors in France were turned off and coal-fired power plants in Germany and Austria were reactivated. No one remembers the “green” agenda anymore. Europeans urgently need additional capacity to provide the population and businesses with an increased load of air conditioners.

Under these conditions, in the first half of this year, the export of Russian coal, according to CoalMint, amounted to 108.7 million tons, which is 4% more than the same period last year. As Igor Galaktionov, an expert at BCS World of Investments, explained to MK: “Demand for coal in the world remains high against the backdrop of record gas prices. Sanctions are sanctions, but electricity needs to be generated.” In addition, the EU coal embargo came into force only in August, so until that moment, consumers were in a hurry to fill warehouses with Russian coal, which was sold at a significant discount, the analyst added.

Indeed, in the second quarter, Russian coal was sold abroad at a decent discount compared to world benchmarks. However, despite expectations of a slowdown in the global economy and a new wave of the pandemic, the level of export sales prices was 30-40% higher than in the second quarter of 2021.

The cost of thermal coal in Europe (API2 index) and Asia (NEVC index) doubled in 2022. “The key support factor was record gas prices amid EU attempts to cut off Russian supplies and wild demand for LNG. Traditionally, the increase in power generation for air conditioning in the summer was provoked by the heat in the Asian region,” Galaktionov noted.

“At the beginning of the year, world coal prices were at around $120-150/t, at the moment steam coal futures are traded above $300/t,” Nariman Taiketayev, director of the NKR agency’s corporate ratings group, told MK.

According to him, domestic prices for energy coal grew following the world ones. But not at such a significant pace: the average price of grade D coal, which is the main one for domestic coal-fired power plants, increased by about a third compared to the average price of the previous year, reaching a level of 2.7 thousand rubles. per ton in the first half of 2022.

Among other important domestic factors, one can note the establishment by Russian Railways from March to June of a temporary order for freight rail transportation in the east direction. As a result, the priority for coal mined in a number of Russian regions was lowered in order to ensure the possibility of transporting goods with a higher margin. “These temporary restrictions had a negative impact on the activities of coal companies from Buryatia, Kuzbass, Tuva and Khakassia,” Taiketaev said.

Another important internal factor is the strengthening of the ruble, which this year reduced the export earnings of coal miners in ruble terms. It is no secret that up to half of the coal produced in Russia is exported.

Judging by the Russian Railways shipment data, the first half of the year looks good for Russian coal miners. A decrease of about 8% in absolute terms can be offset by rising prices, so the results of coal miners will be good, experts are sure. Evraz’s report is a clear example of this.

Metallurgists let us down

If in the energy segment the use of coal increased slightly, then in metallurgy, on the contrary, demand sank significantly, Vladimir Chernov, an analyst at Freedom Finance Global, told MK. According to the Ministry of Industry and Trade, this year metallurgical enterprises have reduced their output by 40%. “Coal consumption by these companies has also decreased by about the same amount. It is no coincidence that the shares of Mechel and Raspadskaya this year fell in price by about 30% at first in February, but by now they have already won back half of the fall, as they were able to gradually reorient sales markets, ”the analyst added.

This year, according to the World Steel Association, steel consumption in Russia will fall by 20%, to 35.1 million tons against 43.9 million tons in 2021. No better than expectations in foreign markets. Export prices for coking coal are now being corrected, and taking into account the Russian discount, they may even turn out to be lower than last year’s levels. In addition, the capacity of RZD in the eastern direction is limited, which creates difficulties for the redirection of supplies from the EU.

“In terms of metallurgical grades, we see a strong correction in June-July, which nullified all growth since the beginning of the year. Prices are still high when compared with the average annual values ​​of previous years. But already in the third quarter of 2022, coking coal producers may show a decrease in revenue,” Igor Galaktionov emphasized. In his opinion, the negative price dynamics is associated with a reduction in steelmaking capacity utilization against the backdrop of problems with COVID-19 in China, as well as a global economic slowdown that could develop into a full-fledged recession.

Looking at margin

According to Vladimir Chernov, this year and next year, Russian coal companies will not increase production volumes. Now the main thing for them is to increase the profitability and marginality of the business, which is not so easy to do in the current conditions. But each company has its own markets, for some, business development may involve an increase in production this year, the analyst says. As for the dynamics of world prices for coal, they, in his opinion, will continue to grow, as prices for other energy sources continue to increase. And in the coming autumn, most likely, the EU countries will become one of the main consumers of coal: an acute shortage of natural gas will force them to soften their environmental policy for the sake of the economic benefit of the population.

The experts of the International Energy Agency also remain optimistic. By 2022, they predict total coal consumption for power generation, steel production and other industrial purposes will rise to a record level of just over 8 billion metric tons, and will remain at that level until at least 2024.