Demand for Russian coal drops amid vanishing price advantage

With the deep discounts receding, Russian coal seems to be losing its attractiveness since the second quarter, with many buyers finding alternative sources of the fuel and some returning to the sellers from whom they imported seaborne coal before the Ukraine-Russia conflict disrupted trade flows, an analysis by S&P Global Commodity Insights showed.

Russian coal exports increased 11.91% on the year to 192.6 million mt in 2022 after the imposition of European sanctions, as relatively lower prices of Russian coal attracted buyers, mainly in Asia, according to data from S&P Global Commodities at Sea.

Among Russia’s non-European coal buyers, only Japan has cut down imports, removing itself from the list of top-five Russian coal procurers, which now consists of China, India, South Korea, Turkey and Taiwan.

However, overall Russian coal exports have slowed down, growing at a slower pace of 7.40% on the year to 100.1 million mt in the first half of 2023. In the May-July period, exports fell 8.67% on the year to 49.5 million mt, CAS data shows.

Many in the market said these were early signs of weakening Russian exports, which would sustain throughout the second half of 2023, leading to annual coal sales volumes staying lower than 2022 levels.

Between May and July, India's imports of Russian coal slipped to 5.6 million mt from 6.1 million mt in the similar period a year ago and South Korea's imports slumped to 6.2 million mt, down 16.22% from the corresponding period of 2022.

Meanwhile, China's imports of Russian coal increased by 3 million mt on the year to 22.2 million mt between May and July as the nation increased its overall coal imports, amid expectations that economic activities would boom after it lifted the COVID-19 restrictions.

Turkey increased its import of Russian coal to 6.2 million mt in May-July from 5.6 million mt during the same period in 2022, while Taiwan's imports were at 2.3 million mt, marginally up from 2.2 million mt a year ago.

Vanishing Russian discounts

The slowdown of Russian coal exports coincided with its rising prices and the availability of more affordable alternatives, as sellers from other origins -- especially Australia -- lowered their prices to claw back their market shares in Asian countries as Europe has stopped buying coal since the start of 2023.

The average price of Russian 6,000 kcal/kg NAR coal fell from $179/mt FOB Pacific in June 2022 to $98/mt in the corresponding month of 2023, according to Platts data from S&P Global Commodity Insights. However, in the last week of July, it was priced at $107/mt, indicating a gradual rise in prices.

Concurrently, the average price of Australian low-ash 5,500 kcal/kg NAR FOB Newcastle coal fell 52.69% on the year to $88.8/mt in June 2023, and remained below $90/mt by the end of July, leading to waning demand for Russian coal, which lost its price advantage.

While Russian coal exports are coming off the highs touched during the last quarter of 2022 and the first quarter of 2023, Australian supply has been increasing during the same period.

Apart from lower prices, the resumption of coal trade with China after the unofficial ban was lifted earlier in the year also played a role in the recent boost in Australian coal exports.

Australia's coal exports stood at 97 million mt between May and July, up from 86.9 million mt in the same period in 2022.

Way forward for Russian coal

Russian coal exports are likely to continue seeing the ongoing decline as buyers turn their attention to alternatives that are cheaper since overall demand in the market has been subdued, market sources said.

China may continue to hoard much of the supply coming in from Russia due to friendlier ties between the countries and lower freight costs, but countries like India may prefer other options amid high domestic coal production.

Having already seen European doors close on them following the country's conflict with Ukraine, Russian producers, who have now lost their price advantage, may have to once again look for new buyers that would be willing to purchase fresh supplies from the country.