European ban looming

With the European coal ban set to be implemented on August 10th, we look at how the seaborne coal market will develop going forward.

Exports to Europe slowdown

Since the initial rush in coal ordering by European buyers in March shortly after the Ukraine-Russia war commenced, volumes discharging at European ports have declined each month. In June, only 7.9 MMT of thermal coal landed in Europe, declining by 19.1% MoM, but still more than double YoY. Additionally, thermal coal loadings to Europe declined by 22.3% YoY, in part due to the uncertainty over the deliveries from the Nord Stream 1 natural gas pipeline, which some think will get back to full capacity.

Much of this can be attributed to the sharp decline in imports from Russia which several utilities in Europe started avoiding almost immediately in March. Russian liftings into the bloc continued while power stations looked to secure supply from elsewhere, but so far alternate producers have not made up for the additional volumes. There is also the issue of storage at ports in the ARAG region. Coal storage is at extremely high levels and is now being extended to areas allocated for iron ore, for example. Buyers are struggling to get the coal in-land to power stations by river as the recent heatwaves continue to reduce water levels on the Rhine. In the past couple of days, these levels have reduced further, with some vessels reportedly only loading to 30% capacity depending on their destination. This brings the prospect of continued vessel pile ups at ARAG ports, worsening bottlenecks.

Short-term decline in Australian liftings

Heavy rainfall in eastern Australia has caused a backlog in shipments from the region, particularly the port of Newcastle, Australia’s largest coal port. Newcastle is currently operating under freshwater conditions due to run-off from the flooding on-land and thus loading has largely been limited to Panamaxes, with any Capes scheduled to load currently waiting in anchorages until it is possible to fully-load. Current weather forecasts from Reuters suggest the rain will continue into next week before easing off. From a European import perspective, delays could cause a burst of arrivals and add to further bottlenecks on the European end.

Potential lifting of China-Australia coal ban

With reports circulating that the Chinese government is considering ending its unofficial ban on Australian coal, it seems the benefit lies predominantly in metallurgical (met) coal. In the twelve months before the ban was enforced, China imported an average of 4.6 MMT of thermal and 3.6 MMT of met coal from Australia. Since then, China’s met coal imports have significantly declined compared to a sharp increase in thermal imports, averaging 2.7 MMT per month. In 1H22, the country imported just 11.6 MMT of met coal, declining by 35.8% YoY. Naturally, the decline in met coal imports has come in tandem with declining steel production and expanding domestic coal production. Most of the imported volumes since the ban was implemented have been sourced from Russia, Canada, and the US, though volumes from the US and Canada are very limited as miners in these countries are at full capacity. With Chinese steel demand growing weaker and profit margins at steel mills largely diminished, acquiring cheaper inputs would relieve some of the pressure on Chinese steelmakers. As of today, premium Australian met coal prices present a $113 discount to domestic prices in China.

As the Chinese government continues to try and revitalize its economy through infrastructure-focused stimulus packages, easing strains on one of its largest industrial sectors is likely of high importance. This incentivizes cheaper Australian met coal because it improves margins, particularly as iron ore prices have moved higher this week on supply concerns.

Unlike met coal, Newcastle thermal coal prices are trading at a considerable premium to all alternative coal suppliers, given Europe’s rising demand. This of course lowers the incentive Chinese buyers have towards buying Australian thermal coal. 2021 was a strong year for Chinese thermal coal imports, averaging 23.4 MMT per month versus just 18.9 MMT in the twelve months before the ban. Inventories at Chinese power stations are at healthy levels, with an aggressive relaxation of Covid policy the most likely event that would see energy use rise dramatically and these stockpiles diminished. In 1H22, however, thermal coal imports have declined by 31.1% to 92 MMT. As is widely known, strong domestic thermal coal production in China, and cheaper alternatives such as Indonesia, indicate there is little reason to believe Australia-China thermal coal shipments will recover to near pre-ban levels.

In the event China does lift the unofficial ban on Australian coal, we see this starting as primarily a met coal trade given the price incentive for Chinese buyers. As a result, we can expect the longer thermal coal voyages out of Australia to continue, such as to Europe, while more met coal is exported to China simultaneously. On thermal coal, if China did opt to import more from Australia, some of these volumes are likely to replace liftings from Indonesia, which again results in longer voyages.

India importing more Russian coal

In June 2.7 MMT of coal was lifted on bulk carriers from Russia to India, by far the largest monthly total on record. India has shown a clear willingness to buy Russian coal and given the heavy discounts it will achieve compared to other suppliers, we expect this to continue and likely continue to increase. In the event India does continue to import Russian coal at these levels, or even higher, this does free up volumes in Indonesia, Australia, and South Africa for other buyers, such as Europe and South Korea.

While the EU, South Korea and others are actively shunning Russian coal and looking for substitutes, we believe the longer coal voyages will continue, albeit with increased competition. The fact that several major buyers are not sanctioning Russian coal and are importing more from the country frees up volumes for the longer voyages into Europe. This would more than offset the shorter voyage from Russia to India.