Prices of high-CV thermal coal from South Africa and Australia breached the crucial $400/tonne-mark as buyers in Asia and Europe are being unable to find alternative sources to replace Russian coal.
With the Russian invasion of Ukraine now entering a new phase, industry experts predict an extended period of higher coal prices in the near term.
Supply disruptions have increased, which is the primary factor driving the rally in prices.
Notably, South African RB1 (6000 NAR) grade prices rose to their all-time high of $425/t FOB on 2 Mar’22, rising by 130% m-o-m and 370% y-o-y, while the Australian 6000 NAR is at $408/t, up by 70% m-o-m.
Russian coal exports at risk
USA, EU, and several other countries, including China, expanded their sanctions on Russia, curtailing many Russian banks’ access to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system.
Loading of Russian coal has almost stopped amidst uncertainty over payments. Overall freight costs are also seen rising as these may soon add war premiums for any shipment from the country.
The ejection of Russia from the SWIFT system has stopped it from operating worldwide and is effectively blocking its exports and imports.
China is Russia’s largest coal buyer, importing 44 mnt of coal last year via rail and sea, accounting for roughly 15% of China’s total imports, and was its second-largest supplier after Indonesia.
According to market participants, Japan, South Korea, and Taiwan are likely to purchase more of Indonesian coal in the near term as these countries face uncertainty over their Russian shipments.
Constrained supply in key exporting countries
The tight coal supply situation in key exporting countries such as South Africa, Australia, and Indonesia catalysed the rally in thermal coal prices currently.
Australia: Heavy rainfall in the east coast of Australia has already hampered coal production and logistics as truck and rail movements have been put on hold till water levels recede. With more rainfall expected next week, this can cause severe flooding, further disrupting supplies from the region.
South Africa: Critically low coal stock at RBCT Port continue to push premiums of RB2 and RB3 higher, by over $7/t, with more and more import inquiries pouring in from Europe.
Indonesia: Tight domestic supply conditions in Indonesia has forced miners to direct coal supply into domestic power plants like PLN and independent power producers. Moreover, with the shortage of barges and floating cranes, miners were also cautiously limiting their offers for Mar’22 loading.
What’s happening in China?
Lower domestic coal prices in China has compelled traders to limit any major procurement of Indonesian coal currently. However, a few power utilities were also seen issuing tenders for low CV grades, these being cheaper.
With the rising output at domestic mines, China’s state planner, NDRC, has set a price guidance for 5500 NAR grade coal at RMB 570-770/t ($90-122/t) at Qinhuangdao Port for medium and long-term contracts. Daily coal production in the country has risen to 12.2 mnt/day, while rail and road delivery of coal to power plants has accelerated to build inventory ahead of the summer season.
Several Chinese traders were scaling back imports of Russian coal, despite higher demand as state banks declined to issue letters of credit. A few traders, on the other hand, that were still willing to book Russian coal were offering Chinese currency for the first time.
Short-term outlook
CoalMint believes, even if the ongoing political tension between Russia and Ukraine is resolved, thermal coal prices woulld remain high because of stringent supply conditions in several regions. The expanding sanctions on Russia by western and Southeast Asian countries would also continue to create difficulties in carrying out financial transactions with the country.
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