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Kirill Rodionov

Kirill Rodionov

Kirill Rodionov is a research fellow at the Financial Research Institute of the Russian Ministry of Finance. For the last ten years, he has been…

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Russian Coal Exporters Face Nightmare Scenario In Asia

Trying to redirect supplies from the European to the Asian market, leading coal exporters face a slowdown in demand in India, Japan and South Korea, which leads to a price decline in the world's hottest coal markets.

Already severely hit this year by falling coal prices in Europe, Russian coal companies, in recent months have been faced with a decline in the Asian price premium. In May, the difference in export prices in the Baltic region and the Russian Far East exceeded $ 30 per ton, but in August it fell below $ 20, and in November - even below $ 15 (hereinafter Refinitiv data, unless otherwise indicated).

The Alternative is Illusory

The reason was the contraction of the European coal market, which largely forced the world's leading exporters to redirect supplies to Asia. From January to November 2018, marine coal imports in Europe declined by 6.4% in annual terms, while over the same period in 2019, it fell by 13.7% (to 133.8 million tons). The drop in European supplies from Indonesia, Australia, Russia, the USA and Colombia accelerated almost equally (from 5.4% to 10.3%), while these five countries accounted for 84% of global coal exports last year (718.8 million out of 858.8 million tons of oil equivalent, according to BP). As a result, they began to increase exports to Asia more rapidly: in the first 11 months of 2018, exports grew by 4.3%, and for the same period in 2019 - by another 6.2% (up to 765.6 million tons).

However, the increase in supply came across a slowdown in demand in the four largest Asian markets - in Japan, South Korea, India and China, whose combined share in world coal imports last year more than three times exceeded Europe (58.3% against 17.4%, according to BP). From January to November, Japan and South Korea — countries where the share of coal generation last year decreased from 34.5% and 45.4% to 33% and 44%, respectively — cumulatively reduced marine coal imports by 1.8% in annual terms (up to 273.1 million tons), i.e. even stronger than the same period last year (1.2%). India reduced marine coal imports even more intensively, even if this happened only in recent months: having increased imports by 12.2% and 17.8% in the first and second quarters, respectively, in the third quarter the country reduced it by 5.4%, and in October and November - by 8.5%. Related: How Much Oil Does The $1.5 Trillion Fashion Industry Use?

The reason was the slowdown in the Indian manufacturing sector. According to IHS Markit, the Indian PMI Manufacturing index reached a two-year low of 50.6 points in October, and then rose slightly to 51.2 in November, but remained close to the threshold of an industrial recession (50.0). The Chinese PMI Manufacturing Index was below this threshold for six consecutive months (from May to October, according to the Chinese National Statistical Bureau) before it reached a modest 50.2 in November. This is partly why the growth of marine coal imports in China slowed down from 20.9% and 27.9% in the second and third quarters to 12.1% in October and November. The import of liquefied natural gas (LNG) also negatively affected the consumption of coal in China: in the first 11 months of 2019, its growth slowed to 14.3% (compared to 40.3% for the same period last year), but still remains double-digit.

The Costs of Globalization

Due to competition with gas, the role of coal is also declining in Europe, where from January to November, LNG imports increased by 75% (to 79.9 million tons). Coupled with the industrial recession in the Eurozone (where the PMI Manufacturing Index was below 50 points for ten consecutive months, according to IHS November data) and the collapse of coal generation (which fell from 19% in the EU from January to June, according to Sandbag), this led to a serious drop in prices. In the first 11 months of the year, the price of coal in the Baltic region fell by 37% (to $ 49.5 per ton), dropping below $ 50 for the first time since 2016, when coal prices also declined at key Asian hubs (such as Australian Newcastle and Chinese Qinhuangdao), and the premium for coal supplies to the East fell to $ 5 per ton. Related: The Oil Bulls Are Back Despite Bearish Fundamentals

A similar scenario is likely to repeat in the coming months. Like three years ago, prices fell not only in the Baltic region and in the Russian Far East (by 32% from the beginning of the year to the end of November), but also in other major world hubs - at the South African Richards Bay (14% over the same period) and the Colombian Bolivar (36%), as well as at the already mentioned Newcastle (33%) and Qinhuangdao (8%). And this is no accident, since prices on the global coal market are more synchronized than, for example, on the LNG market, where prices may vary even within the same region, as is the case with the East Asian JCC and TR NE North Asia LNG spot indices ($ 10.45 versus $ 5.66 per million British thermal units, according to the November Refinitiv data).

That is why Russian coal companies are threatened by a further reduction in the Asian premium, due to which it would be possible to win back the fall in European prices – the latter, however, set the price dynamics in other regions. The coal market globalization results in a frontal drop in profitability, which is already declining due to growing competition from gas and renewables. This, apparently, is the market New Normal, which Russian coal suppliers will have to reckon with.

By Kirill Rodionov

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