Japan companies accelerate move to replace Russia coal with Australian supply, others

Japanese utilities and manufacturers are stepping up efforts to seek alternative supplies to Russian coal from Australia, Indonesia and Vietnam, among others, the Ministry of Economy, Trade and Industry said May 17, following the country's decision to phase out Russian coal imports.

"Power utilities and manufacturers are accelerating their efforts to replace Russian coal via alternative procurements from Australia, Indonesia and Vietnam among others," documents presented to METI's electricity and gas policy subcommittee May 17 showed.

Japanese manufacturers that use thermal coal for their own power generation have more than a month's worth of stocks, but a few manufacturers have a high dependency on Russian supply, according to the documents.

Japanese steelmakers have relatively low dependency on Russia for coking coal, but there is a higher dependency on a certain Russian coal grade, with steelmakers needing to consider alternative procurements, the documents said.

Russia was the second-largest thermal coal supplier and third-largest coking coal supplier to Japan in 2021, sending 12% and 8% of the country's total thermal coal and coking coal imports, respectively, according to finance ministry data.

Japan, the world's third-largest coal importer, announced its decision April 8 to ban Russian coal imports in phases as part of a commitment of G7 leaders. Thermal coal accounts for 60% of Japan's coal use, with coking coal accounting for 40% of the coal usage.

Considering risks

Speaking at the electricity and gas policy subcommittee, Kaname Ogawa, METI's director of electricity infrastructure division, said Japan would need to consider various risks and contingency actions by the government during emergency.

"As the sanctions [against Russia] proceed from coal to oil in steps, we need to consider when the sanctions measure strengthen further from a fresh new perspective," Ogawa said. "We need to consider various risks involved."

Ogawa also underlined the need for Japan to enhance its involvement in fuel procurement activities in times of emergency by considering such a single framework to gather data on fuel procurement and inter-exchange of fuels, as well as the country's role in procuring fuels from the international markets.

Japan's decision to phase out Russian coal was followed by Japanese Prime Minister Fumio Kishida saying on May 9 that Japan would ban "in principle" Russian oil imports following the latest commitment by leaders of the G7. They agreed May 8 to phase out Russian energy, including oil, "in a timely and orderly fashion," while ensuring "stable and sustainable global energy supplies and affordable prices for consumers."

Imports of Russian LNG by Japanese power and gas utilities are less than 10% of their total imports, according to the METI documents.

The share of Russian LNG in imports by Japanese power utilities is expected to slide to about 8% in fiscal year 2022-23 (April-March), from about 9% in FY 2021-22, while Russian LNG imports by gas utilities will account for about 9% in FY 2022-23, down from 10% in FY 2021-22, METI said in its documents, citing FY 2022-23 supply plans by the utilities as of early April.

Russia, the fifth-largest supplier to Japan, accounted for 9% of total LNG imports of 74.32 million mt in 2021, according to the finance ministry data.

Boost for Australian coal

Australian coal prices have remained elevated as demand to replace Russian coal by Europe and Japan continues to change trade flows.

Market participants said the dominant share of Australian coal flowing to Japan may rise further given the proximity of the origin as well as existing trade flows.

The price of Newcastle 5,500 kcal/kg NAR coal with 23% ash has soared 93.2% since the beginning of this year to $200/mt FOB on May 13, according to Platts data from S&P Global Commodity Insights.

Japan imported 13.879 million mt thermal coal from Russia in 2021, the second-highest after Australia, which sent 81.669 million mt last year, accounting for 73% of total thermal coal imports, according to finance ministry data.

Indonesian thermal coal imports in 2021 totaled 10.010 million mt, or 9% of total imports. There were no imports from Vietnam in the same year.

"The demand will mostly be covered from Australia and not Indonesia because Japanese market only absorbs medium to high-CV, therefore the demand will be covered mostly by Aussie coal ... and its [Australian] price should rise further," an Indonesia-based producer said.

Market participants also said they expected metallurgical coal to follow a similar trend, with most Russian met coal being replaced by Australian-origin fuel.

HCC Peak Downs FOB Australia has risen 45% since the beginning of this year to $520.25/mt FOB on May 13, while premium low volatile HCC has risen 44% to $515.25/mt FOB in the same period, S&P Global data showed.