Thu. Jul 7th, 2022

Russian coal producers may struggle to redirect volumes to Asian markets if the EU proceeds with a threatened total import ban, analysts and industry participants said.

EU diplomats were this week discussing an embargo on purchases of Russian coal, part of an attempt to penalize Moscow for its invasion of Ukraine. Constraints on Russia’s railways, and the possibility that some Asian buyers will “self-sanction” and stop purchases following the EU lead, could shake up the sector, a big employer in Russia.

“We think the market is facing a complicated puzzle, and we expect some of Russia’s exports could be lost due to logistics challenges – possibly in the order of 30mn tonnes,” Morgan Stanley analyst Marius van Straaten said.

Russia has already been gradually rerouting volumes towards Asia and sent more than half of its coal exports east last year.

Nevertheless, around a quarter of Russian thermal coal exports – 48mn tonnes of about 190mn tonnes, according to Morgan Stanley data – went to Europe last year.

European coal imports rose 10 per cent on the previous year, according to the Russian energy ministry, as the continent searched for alternatives to expensive gas.

“Redirecting all this coal to the east is impossible. The (railways) do not have the additional space to carry it, ”said Natalya Zubarevich, a director at the Independent Institute for Social Policy in Moscow.

Most Russian coal is sent by rail either west to Baltic and Black Sea ports or east to Pacific ports. Only two rail arteries connect east to west: the Transsiberian and the Baikal-Amur Mainline (BAM) railways.

Capacity is being expanded but will not make a significant difference for some time, Zubarevich said.

A representative at one of Russia’s biggest coal producers said: “The biggest issue that has been on the mind of everyone in Russia’s coal industry lately is limited transportation capacity. We have been pushing for increased eastward railway capacity for a long time but it is still not ready to handle the coal volumes we need. ”

The person described the need to rapidly move more volumes to Asia as “critical”.

Russian miners are clamoring for the national monopoly rail operator, Russian Railways, to shift consumer goods cargos off trains so they can create capacity to export more coal towards Asia.

Even if logistical issues could be overcome, western analysts raised doubts over the amount of demand outside China, which currently imports around the same amount of Russian coal as the EU, according to Morgan Stanley.

“I would question whether Japan, South Korea or Taiwan are going to be all that keen on supporting Russia and buying its coal when the EU has come out with a ban,” said Steve Hulton, senior vice president of coal at Rystad Energy.

Japan, South Korea and Taiwan together account for 28 percent of Russia’s thermal coal exports.

High global prices are reassuring some in Russia, however. On Wednesday, futures linked to the benchmark European coal price were trading at $ 295 a tonne, up from $ 180 before the war in Ukraine started.

Vladimir Khripkov, a Siberian coal mine developer who is helping to launch a new mine project this summer, said he feels confident the region will not struggle to ship its high-quality coal to Asia.

Moreover, at current global coal prices, coal producers are “bathing in chocolate”, Khripkov said.

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