Russian thermal coal market in a liquidity crisis amid geopolitical turmoil, logistical curbs

As Russia copes with international trade in a sanction-enforced world, liquidity for thermal coal -- especially the premium grade 6,000 kcal/kg NAR -- has started to become inconsistent as logistical hurdles, dried-up financing and uncertainty of trade conclusion remain key roadblocks.

Market participants said the lack of clear pricing direction, and more so due to opportunistic selling by Russian producers and traders with varied offers on both FOB and CFR basis for different countries, has made them look for similar coal grades from conveniently accessible origins like Australia, Columbia and the US.

Platts, part of S&P Global Commodity Insights, assessed FOB Russia Pacific 6,300 kcal/kg GAR (6,000 kcal/kg NAR) at $102/mt on Oct. 25, reflecting the offers, bids and deals circulating for delivery to China and India. However, offers made for spot cargoes to South Korea were heard to have been at least $8/mt higher, sources said, adding pricing is now done based on who can pay more.

Shifting market dynamics

The crisis for Russia's coal industry began with the invasion of Ukraine in 2022, until which point the sector heavily depended on European buyers. Following the European Union's ban on Russian coal imports, exporters were compelled to pivot their focus eastward, seeking new opportunities in Asian markets.

At first, China and India were willing importers, eager to snap up Russian coal at discounted prices. Russia’s 6,000 kcal/kg NAR coal, typically sold at a premium, was then entering these markets at deep discounts.

But this discount-driven trade carried hidden costs, particularly as Russian exporters ran into logistical bottlenecks.

With the deep discounts receding, Russian coal lost its attractiveness in the second quarter of 2023, while many buyers found alternative sources of the fuel and some returned to prior sellers.

Moreover, as freight costs spiraled, Russian exporters faced eroding profit margins. This resulted in lesser availability of coal at the east coast and suppliers only choosing buyers ready to pay higher prices for their cargoes.

Russian thermal coal exports stood at 132 million mt in 2021 but rose 12.12% year on year to 148 million mt in 2022, S&P Global Commodities at Sea data suggests. The exports in 2023 fell to 133 million mt, slightly higher than imports before Russia's invasion of Ukraine, but down 10.13% from 2022 levels when the price advantage disappeared.

Russian exports have only been 105.5 million so far in 2024, CASdata suggests, likely to slow down further as ports freeze and availability of cargoes becomes scarce.

Logistical constraints

Logistical hurdles have had an unexpected consequence for the market, with liquidity for 6,000 kcal/kg thermal coal seen beginning to evaporate.

Financial institutions had also grown wary of funding new coal projects, further limiting the ability of Russian producers to maintain a steady output of 6,000 kcal/kg NAR grades.

"First, all Russian suppliers are selling to such premium market and [South] Korea (around 8 million-9 million mt), Taiwan (around 8 million- 9 million mt), Malaysia (around 3 million mt) ... China is consistently at the end of the line for shipments on the East Coast. Additionally, Russian producers of metallurgical coal receive priority for rail transport because it offers higher netback prices compared to steam coal," said a Singapore based trader.

While price discussions for Russian 6,000 kcal/kg NAR to South Korea over Oct. 6-25 centered around a wide range of $116/mt CFR and $125/mt CFR basis for December-loading Panamax cargoes, China indicative prices were heard at $106/mt CFR and $107/mt CFR levels for similar cargoes both from east coast over the same period.

Buying indications from India, on the other hand, were heard at $110/mt CFR levels from east coast in the same period, and only few offers were heard for India at prices not less than $118/mt CFR, sources said. With cargoes offered only from west coast to the Indian market due to their low bids, fewer buyers were willing to seal deals due to high freight rates.

The price of FOB Russia Pacific 6,000 kcal/kg NAR averaged $93.9/mt FOB in January-September, down from $115.65/mt FOB over the same period the previous year, data from S&P Global Commodity Insights showed. Platts last assessed the grade at $100/mt on Oct. 18, Commodity Insights data showed.

"The rising costs of railway, freight, and port services have significantly squeezed the margins for sellers in western Russia. This has made it increasingly challenging for them to offer competitive prices for coal to us," said an India-based trader.

Although the Russian government removed the duties on its export of thermal coal and anthracite starting May 1, its impact on the demand was not significant.

Some buyers resorted to longer-term contracts, locking in whatever Russian coal they could at discounted rates, but the risk of delivery delays and geopolitical instability made even these deals fraught with uncertainty.

After sanctions were imposed on Russian suppliers like SUEK and Mechel that made even other non-sanctioned suppliers wary of dispatching their produce through ports used by the sanctioned companies, South Korean power generating companies were heard to be revising their term contracts.

Nonetheless, escalating power demand in South Korea and news of Russian government raising freight rates as reported by local media by 2025, compelled buyers from the country to secure Russian cargoes, sources said.

"South Korea is trying to stock up on Russian supplies as Australian high CV prices has been less competitive," Pat See Khoo, senior analyst with S&P Global, said.

As profit margins for Russian traders continue to tighten and the availability of rail transport diminishes, the liquidity crisis for 6,000 kcal/kg thermal coal is likely to persist.

Without significant changes in market conditions or a revival in demand, the future of Russian coal exports remains uncertain, casting a shadow over the industry’s ability to recover from the ongoing turmoil.