Removal of export duty may lift demand for Russian thermal coal

Russian thermal coal may see higher demand following its government's decision to temporarily remove the duties on its export of thermal coal and anthracite from May 1 to Aug. 31, market sources told S&P Global Commodity Insights.

The top five consumers of Russian thermal coal, barring Taiwan, have seen a drop in imports from Russia as a result of various factors including the availability of cheaper alternatives, the sanctions in place against Russia'smajor coal exporters and the country's tariffs, market participants said.

China, Russia's largest export destination for thermal coal, has seen inflows of the latter's product fall to 12.8 million mt in the first four months of 2024 from 14 million mt in the corresponding period of 2023, according to S&P Global Commodities at Sea data. China itself reintroduced import tariffs, which also impacted the purchase of Russian material as it does not have a Free Trade Agreement with China.

Turkey, one of the major markets for Russia in the Europe, Middle East and North Africa region, has also witnessed a fall in imports of Russian product, buying only 6.7 million mt of thermal coal thus far in 2024 compared with 7.4 million mt in the corresponding period a year earlier. Similarly, South Korea's Russian thermal coal imports stood at 5.4 million mt in January-April compared with 7.6 million mt in January-April 2023 while India's inflows were at 4.1 million mt over the same period, down 1.7 million mt from a year earlier, the data showed.

Meanwhile, Taiwan has imported 2.9 million mt so far in 2024, up from 2.2 million mt over a similar period in 2023, the data showed.

Road to recovery

The removal of tariffs may bode well for Russian suppliers, who have lost market share to suppliers from South Africa, Australia and Colombia in recent times, as prices of Russian thermal coal are expected to come off from the current levels, sources said.

"Yes, it will boost exports and also since production was less, China may buy," an India-based buyer said.

Echoing this sentiment, an India-based trader said, "If the payment issues are sorted among the buyers and sellers, this will have an impact in the high-calorific value [CV] space as [Indian] buyers may rush back to Russian suppliers, which may pull back prices of South African and Colombian 6,000 kcal/kg NAR coal."

Although temporary, the tariff removal could also be a welcome relief for Russian coal producers in the western part of the country, who primarily serve the markets in Europe, Middle East and North Africa along with India.

Higher railway, freight and port costs impacted the margins of sellers in the western part of the country, making it difficult for them to supply material at a desired price to Indian buyers. Meanwhile, producers in the Far East benefitted from relatively lower freight rates as producers in this region tend to primarily deal with buyers from China, South Korea, Japan and Taiwan, market participants said.

"On average, they were making $0-$5/mt margin, some were even operating at negative margins whereas the producers in the Far East did not face any such trouble because the freights to the primary markets were significantly lower," another India-based buyer said.

A South Korea-based trader dealing with Russian thermal coal said that the reduction in export tariffs along with a cut in port fee may not necessarily prompt Russian suppliers to lower their prices as supply from the country remains tight amid sanctions on the largest Russian coal exporters SUEK and Mechel.

Port fee at one of the largest Russian ports on the West coast -- Taman -- was as high as $35/mt earlier in the year, which prompted a boycott by all miners in February and March. However, from mid-April the port authorities have reduced the fee to $18/mt, another India-based buyer said. The buyer also highlighted that the reduction in port fees coupled with the removal of tariffs could help improve margins for producers operating in the western part of Russia.

Indian buyers are currently being offered Colombian and Russian 6,000 kcal/kg NAR thermal coal at $105-$107/mt on CFR basis. Meanwhile, for South Korean buyers Russian, Colombian and South African high-CV coal was offered for less than $120/mt.

Platts assessed FOB Russia Pacific 6,000 kcal/kg NAR coal at $90/mt April 26, flat on the week, showed S&P Global data.

However, the freight cost on the routes from South Africa and Colombia to Asia is higher compared with routes undertaken by Russian suppliers, hence, Colombian and South African thermal coal prices may come down to compete with Russian material, market sources said.

Apart from leading to more demand for thermal coal, a source at a Russian coal producer said that some pulverized coal injection, especially those with low volatile matter, could also benefit from the new policy, although he was unable to state a precise volatile matter content that would trigger the zero duty treatment.

The lower price of Russian high-CV coal may also prompt buyers from India's cement industry to look at the feasibility of using coal instead of petcoke, which is being offered in the market at slightly above the $110/mt-mark for high sulfur US-origin material.

However, another India-based trader said that given the bearish sentiment in the market, the uptick in demand for Russian coal may not be robust.

Moreover, the tariff removal may not impact the demand from China, which has been Russia's major market as China's reintroduction of export tariffs at the beginning of the year is likely to offset any drop in Russian thermal coal prices, sources said.