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Prospects for Russian coal exports to the APR market until 2024
From 2000 to 2020, Russian coal exports increased 5,7 times. How stable is this trend and are there preconditions for its development in the near future?
The forecast of the industry expert - the executive director of the Modern Analytical Agency Nikolay Petrov was published by the Ugol magazine.
IMPORTANCE OF EXPORT FOR THE RUSSIAN COAL INDUSTRY
Coal energy remains the largest industry in the global economy. About a quarter of the world's electricity is generated from coal. Russia is one of the largest coal suppliers in the world market, second only in terms of volumes to Indonesia and Australia. From 2000 to 2020, Russian coal exports increased 5,7 times - from 37 million to 212 million tons. Due to the fact that the volume of world coal trade over the same period of time increased 2,3 times (from 0,6 billion to 1,3 billion tons), the share of Russian coal in the world market increased from 6 to 16% .1 Due to the fact that coal consumption in the domestic Russian market has been steadily declining (coal was losing the inter-fuel competition to natural gas), the importance of exports for domestic coal the industry has gradually grown. If in 2000 15% of Russian coal supplies were exported, then in 2020 - 59%. The financial health and investment plans of Russian coal companies are currently mainly dependent on export supplies. At the same time, in foreign markets, Russian suppliers face a number of market and infrastructural challenges, the overcoming of which will determine the future of the domestic coal industry in the long term.
INTERNATIONAL CHALLENGES FOR THE COAL INDUSTRY
In many countries of the world and a number of intercountry associations, programs have been adopted aimed at restructuring the economies of these countries in favor of a greater emphasis on preserving the climate and reducing environmental pollution. The leaders in this policy are European countries, which have a long-standing market for permits for CO2 emissions and which are gradually moving out of coal energy, developing renewable energy sources (RES). The countries of the Asia-Pacific region (APR) are increasingly revising their energy development plans. In addition to energy, restrictions on the use of coal also affect metallurgy and other industries. Since CO2 and coal emissions have been identified as the main culprits in global warming, the carbon footprint is now becoming the focus of attention.
If in the 2010s. In the leading Western countries, the development of renewable energy sources was widespread (which led to the partial displacement of coal from the energy sector), then in the 2020s. Renewable energy sources will also spread in developing countries (with corresponding consequences for the coal energy of these countries), and developed countries, primarily in Europe, will begin to move away from coal in other industries (primarily in metallurgy). Under pressure from the environmental community, banks are reducing funding for projects related to the coal industry (both consumption and production). Institutional investors withdraw their funds from companies involved in the extraction, consumption or trade of coal.
This trend makes it difficult to finance companies associated with the coal business.
International mining companies are cutting back on investment in coal mining assets. Large oil and gas companies and commodity traders find themselves in a situation where they are forced to engage in renewable energy sources and other "green" technologies. Some international coal traders have started to build their marketing policies accordingly, positioning themselves as suppliers of environmentally friendly coal. For example, EcoCarbon offers on the market so-called eco-friendly or, in short, eco-grades, characterized by a reduced content of harmful substances (sulfur, ash, etc.). The use of these grades of coal reduces emissions of harmful substances into the atmosphere.
Certain risks for coal exports can potentially be borne by the so-called transboundary carbon regulation (TUR). The TUR, as part of the EU's policy of achieving carbon neutrality by 2050, involves the introduction of a duty or additional levy / tax on goods imported into Europe, the production of which was accompanied by CO2 emissions. The introduction of TUR in the EU is expected in the coming years, but the current system of payment for CO2 emissions (EU ETS) does not yet charge suppliers of coal for the CO2 emissions generated by its use.
EXPORT SUPPLIES OF RUSSIAN COAL AND SOLUTION OF INFRASTRUCTURAL PROBLEMS
Under these conditions, Russian coal companies are increasing their exports in the most promising eastern direction for themselves. The APR market currently accounts for three quarters of the world's coal trade, and developing Asian countries, whose economies are not yet tied to severe environmental restrictions, continue to present high demand for cheap energy carriers.
Over the past 20 years, the share of Russian coal exports sent through the ports of the Far East has grown from 26 to 50%, and the physical volume of coal exports shipped from Russian Far Eastern ports has increased more than 10 times. In 2020, the volume of transportation of coal for export in the eastern direction to the ports of the Far East and border crossings with China amounted to 101 million tons, excluding shipments from the ports of Sakhalin and Chukotka - the so-called isolated coal-mining regions - the transportation of coal to the ports of these regions has no effect on the load of the general network of Russian Railways.
According to the CAA forecast, the demand for coal in the APR market in 2024 will grow by 90 million tons compared to 2020 and only by 19 million tons compared to 2019 (in 2020 due to the pandemic, the demand for coal for market of the Asia-Pacific region fell by 71 million tons; see table). It is forecasted that by 2024 the volume of transportation of Russian coal for export in the east direction will grow to 146 million tons (+45 million tons to the level of 2020) according to the conservative scenario and to 185 million tons (+84 million tons) according to the optimistic scenario. A conservative scenario seems more realistic, since under an optimistic scenario, two conditions must be met at once:
1) the entire increase in the carrying capacity of the Eastern landfill (Transsib and BAM) will be transferred for export
coal, despite the presence of other cargo base (oil cargo, ferrous metals, timber cargo, etc.);
2) the entire projected growth in demand for coal in the APR market will be satisfied by an increase in coal supplies from Russia (taking into account plans to increase coal exports from Sakhalin), despite the strong competitive position of suppliers from Indonesia and Australia. An additional obstacle to increasing coal exports to the APR countries in excess of 45 million tons is the predominance of non-specialized terminals in the Far East. Such terminals are not equipped for coal transshipment, they do not have the proper infrastructure, there are no modern coal cleaning technologies designed to ensure the quality of coal required on the international market, which will not be able to provide the necessary level of competitiveness of Russian coal to increase its share in the world market - an increase in coal exports in the Eastern direction according to the conservative scenario (+45 million tonnes) will lead to an increase in the share of Russian coal in the APR market from 11,1% in 2020 to 14,2% in 2024. Most of these environmentally dirty enterprises are located in close proximity to urban development and do not have development plans, which will also have a negative impact, taking into account the current international environmental policy of checking the links of the coal supply chain for compliance with the tightening international environmental standards (according to the similar European system Bettercoal). There are only two specialized coal terminals in the region that are currently capable of increasing the volume of transshipment for export - Vostochny Port JSC and Daltransugol JSC.
COMPETITION WITH FOREIGN SUPPLIERS
From the point of view of the prospects for increasing the supply of Russian coal to the APR market, the positions of steam coal suppliers seem to be more solid. China's ban on imports of Australian coal is fueling demand for coal from other countries, including coal from Russia. Other countries in East and Southeast Asia also show stable demand for coal. South Korea and Japan, although they plan to reduce imports of thermal coal due to environmental considerations, will nevertheless remain among the largest buyers of this type of raw material over the next 4-5 years. Malaysia, Vietnam, the Philippines and Thailand plan to increase their purchases of imported coal during this period. The largest increase in steam coal imports in Asia is forecasted from India, but the supply of thermal coal to the Indian market is less profitable (India consumes cheaper coal), and the main suppliers to this market are Indonesia and Australia, which have not only lower costs compared to Russia at the FOB level (in Russia, the cost of railway transportation of coal from mining regions to loading ports is higher), but also the advantage of cheaper freight.
Russian suppliers of metallurgical coal have the opportunity to increase shipments to the APR market, but on this path they will need to overcome a number of difficulties:
• high logistic restrictions for the export of high quality coking coal grades that
concentrated in Kuzbass (limited ability to export coal from Kuzbass);
• limited volumes of high-quality grades - only a small share of Russian coal supplies falls on hard coking coal - the most expensive and most demanded type of metallurgical coal on the world market (the bulk of Russian metallurgical coal belongs to the categories of semi-hard coking coal, semi-soft coking coal and PCI);
• high market segmentation and individual demand for metallurgical coal intended for use in the charge: different customers have different requirements for different quality characteristics;
• careful selection of suppliers of metallurgical coal: in contrast to the thermal coal market, consumers striving for exact compliance of the purchased grades with technological requirements are more conservative in the procurement of raw materials and are less inclined to change suppliers (test purchases, lengthy selection procedures, etc.);• just as in the case of thermal coal, the main increase in demand for metallurgical coal in the Asian region is expected from India, and Australia is the main supplier of metallurgical coal to this region (for reference: in 2020, the share of Russian coal supplies as energy and metallurgy - to India accounted for 3,6% of all Russian coal exports; a year earlier - 3,4%). In addition, India is seeking to develop domestic coal production, which over time may lead to a downward adjustment in the growth in demand for coal imports. Thus, an increase in coal exports from Russia to the APR market in the amount of 45-50 million tons in the future until 2024 is an achievable goal, but the achievement of this goal is associated with the solution of infrastructure problems (the implementation of previously announced programs to increase the carrying capacity of the Eastern landfill) and successful competition with suppliers from other countries (primarily from Indonesia and Australia).