Deep discounts way forward for Russia to sell coal to India via new route: sources

Russia will have to offer heavy discounts on coal exports to India via Iran's railway system in order to make it competitive for Indian buyers amid a largely oversupplied market and lower-than-expected demand, sources told S&P Global Commodity Insights.

Following western sanctions affecting Russian supplies, the country unveiled a plan to export higher volumes of coal to India through Iran's railway system at the St. Petersburg International Economic Forum, according to local media reports.

Market participants, however, expressed uncertainty over the impact of the latest development on India's demand for thermal coal from Russia, which had already been seeing a downturn after Russian supplies lost their price advantage and global coal prices started to decline.

The new proposed route is expected to reduce the transit time for Russian goods to 15 days from 45 days previously.

"If they (Russia) really want to export higher volumes, they need to offer heavy discounts as at current Russian coal prices, the discounts are not enough to compete with coal imports from South Africa or the US," said a Singapore-based trader who supplies Russian cargoes to India.

Of the 262 million mt of coal imported by India in FY 2023-24, Russian coal volumes stood at 22.2 million mt, S&P Global Commodities At Sea (CAS) data showed, sharply lower than what's expected of the new corridor.

The price for Russian 6,300 kcal/kg GAR averaged $93.95/mt over January-May, while Colombian 6,000 kcal/kg NAR saw average levels of $81.76/mt during the same period. US-origin 6,900 kcal/kg NAR coal on the other hand was priced at $81.01/mt in this period, Commodity Insights data showed.

Platts assessed FOB Russia Pacific 6,000 kcal/kg NAR coal at $93.50/mt on June 7.

The International North-South Transport Corridor (INSTC) project, initiated in 2002, represents a collaborative effort by India, Russia and Iran to create a multi-mode transport corridor connecting the Baltic Sea to the Indian Ocean and the Persian Gulf. The corridor is projected to be 30% cheaper and 40% shorter than the traditional route through the Suez Canal.

India's demand for Russian thermal coal

India-based sources remain divided on the practicality of the use of the proposed route for coal transport.

According to an India-based buyer, "Currently not many Russian thermal coal cargoes are moving to India. But it is difficult to establish if the proposed corridor will help in giving a freight advantage to Indian buyers until there is some movement. Iran already has a huge queue for iron ore dispatch to China and since Iran is under US sanctions, it is difficult to assume how things will pan out. "

The source further pointed out that the market will need further clarity on how the operations side of things are set up, and which Iranian ports will operate, before asking for coal cargoes through the proposed route.

Other India-based sources also were uncertain about the proposed route helping create additional Indian demand for Russian cargoes, especially for thermal coal, as the demand from the Indian market for high CV coal from the industrial sector has been tepid due to a fall in US-origin petcoke prices.

An India-based trader said that only Russian mines nearer the corridor will benefit from the proposed route. Russian coal is being offered to Indian buyers at $110-$112/mt, however, the asking prices are $5-$6/mt lower, the source added.

Russia temporarily removes duties

The Russian government, in May, removed the duties on its exports of thermal coal and anthracite effective until Aug. 31 to ramp up its coal outflows that saw a fall in most countries in the first few months of 2024, Commodity Insights reported earlier. India imported 5.1 million mt of thermal coal from Russia in the first five months of 2024, down 29.16% on the year, CAS data showed.

Market participants, however, said it was implausible that this move would improve the margins and demand of producers from India, adding that cheaper alternatives are always available, especially South African coal. "Some miners in the west coast of Russia were operating with lower margins, and due to higher railway costs and relatively higher ocean freight costs their margins were deeply compromised," an India-based buyer had said earlier.

However, producers' consistent protests reduced the tariffs in one of the major west coast ports by around $15/mt in May, said an Indonesia-based trader with knowledge of the Russian market. So, it seems unlikely the producers would want to reroute their coal unless they are getting considerable discounts on freights and other tariffs, the trader added.

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 sources said earlier.