ECONOMY

Russia’s Invasion Leaves Global Coal Markets In Turmoil

Written by admin

Just as oil prices soared above $115 per barrel and European gas prices moved up to $60 per mmBtu, coal markets have been suffering through some turmoil of their own. Global coal prices surged some 30% in one week, primarily triggered by fears of Russia’s coal supply not hitting the market as several rounds of US/EU/UK sanctions made it complicated to arrange financial lines with Russian sellers. The Asian Newcastle benchmark futures contract rose to $440 per metric ton, with Europe’s API2 March ’22 contract trading at the same levels. Moreover, Europe’s future prices point to a prolonged period of high prices, with the H2 2022 average currently trending above $350 per metric ton, ie triple pre-pandemic levels.

In early February, it seemed as if Europe could weather this winter without the supply catastrophe that many analysts had predicted – gas inventories remain low by any historical standard, but warm weather and above-average wind generation kept the overall mood upbeat. Storm Eunice, bringing record-breaking winds bordering on hurricane speed to Northwest Europe, also ramped up wind generation across the continent. At its peak, Eunice was instrumental in producing almost 50% of the United Kingdom’s total electricity generation. Amidst doubling wind generation in Germany, power prices in Continental Europe dropped to their lowest this year, losing some two-thirds of their pre-Eunice strength. Yet the risk of a Russian coal embargo emerged at arguably the worst time imaginable, just as winds were slowing down (this week, in particular, is expected to be weak) and cold weather kicked in again. Against this background, with gas being exorbitantly high and limited by the availabilities of US LNG, power generators need to start buying coal, with banking sanctions pushing Russian coal out of bounds.

Even the most Russia-friendly market of late, China, has been having difficulties buying Russian coal. State-owned banks have been informing coal buyers that they cannot issue USD-denominated letters of credit due to the ongoing sanctions squeeze, hampering trading activity in general. This, however, does not mean that Chinese banks could not finance the transaction via yuan-denominated LCs, even though these might take a bit longer to iron out and agree on. The Asian coal market felt the heat immediately, with the regional Newcastle pricing benchmark shooting up to levels above $400 per metric tonne, an all-time high for the Asia-Pacific, too. Provided Chinese state banks maintain their reluctance to deal with dollars, the future of Russia’s coal exports will to a large extent depend on yuan-based transactions – after all, only a little less than a quarter of Russia’s coal exports went to China, more than 50 million tones in total.

In the long run, it might be that Russia’s coal flows to China would avoid Western sanctions but, ironically enough, would start to decline on the back of Beijing’s tinkering with coal prices. China’s National Development and Reform Commission (NDRC) mandated late February that domestic thermal coal prices should stay within a ‘reasonable price range’ which it set at ¥570-770 per metric ton, ie $90-120/mt. Domestically, this should be something of a mutually acceptable variant for both the country’s vast coal mining industry and its plentiful coal-based power generator companies, as much as any of those would object against government interference in pricing. The given price range, however, largely invalidates the profitability of coal imports, meaning that if Russia wants to maintain the current volumes of exports, it needs to settle for a price that is right now a third of the global.

China has maintained its ban on Australian coal and is yet to see a full revamp of Indonesian supplies, but robust domestic production has essentially kept the East Asian powerhouse from having a coal price run. Bouncing back from the power crunch of August-September, Beijing relaxed regulatory oversight over the coal industry by fall of last year – the end result is a record high of coal output (4.07 billion) in 2021, output trending above 12 million tons per day , and nationwide coal stocks back at early 2019 levels despite high levels consumption. As a consequence, the Chinese Qinhuangdao price benchmark stands at $150 per metric tonne right now, which – while above the pricing bandwidth set by NDRC – is well below global prices, either in the Asia Pacific region or globally.

CoalSource: Argus.

Europe, on the other hand, is in an antithetical position. With Europe’s thermal coal imports reaching their post-pandemic peak last October, at 7.5 million tons, inflows of coal have gone down as the overwhelming expectation was that the continent could still replenish its gas inventories and ramp up electricity generation from renewables. Thus, thermal coal departures to Europe lingered, bringing total coal inventories in Northwest Europe to the lowest point in many years, roughly half of what they used to be in the pre-pandemic era. Half of Europe’s thermal coal imports come from Russia – some 2.3-2.4 million tons per month – implying that should coal-powered generation be more profitable than gas, supply would become a huge issue. In fact, that has been the case for almost a year already and Europe will be hard-pressed to find alternative supply routes should Russian imports drop off.

At the same time, with there being no major new gas source, European countries have softened their rhetoric vis-à-vis coal. Arguing that pragmatism should trump every political commitment, Germany is now officially mulling the slowing down of its coal phase-out – a mere four months ago, the same Scholz government agreed to accelerate the phaseout and finalize it by 2030 instead of the initial goal of 2038. France has seen a higher share of coal burning, too, after the Ministry of Environment raised the cap of running coal-fired power stations amidst protracted issues with nuclear generation. Italy, too, is moving in the same direction – lambasting the imprudence of not having its own energy sources – the Italian government is working to reopen closed recently coal plants, looking primarily into the three plants that were shut in 2020-2021. All this may accelerate the pace of renewables penetration in Europe, in many cases irrespective of their profitability, so the proliferation of coal now might be detrimental to its prospects in the longer term.

By Gerald Jansen for Oilprice.com

More Top Reads From Oilprice.com:

About the author

admin

Leave a Comment