Feature: Changing coal flows to boost dry bulk ton-miles

Disruption to global coal trade flows following Western sanctions on Russia could boost dry bulk freight rates as ton-miles increase.

The European Council April 8 agreed to adopt another package of sanctions against Russia, including banning imports of coal, in response to alleged war crimes.

The coal ban was one of six elements of the sanctions package and will apply to all forms of Russian coal, namely metallurgical and thermal coal.

The Council said the ban would affect a quarter of Russian coal exports.

"Trade flows are shifting in the coal market with buyers scrambling to replace supplies and as a result increasing voyage distances from trade-route changes," a broker said.

"The US, South Africa, Australia, Colombia and Indonesia could replace Russian coal in Europe leading to longer sea routes," a charterer source said. "This, in theory, should positively affect freight rates. But the question is for how long?"

The Hampton Roads-Rotterdam 70,000 mt coal route assessed by S&P Global Commodity Insights reached its year-to-date high of $28.50/mt on March 24, up 104% from its year-to-date low of $14/mt on Feb. 3 as coal exports from the Hampton Road terminals increased 20% from the previous month to 3 million st in February, according to Virginia Maritime Association data.

Around a quarter of all Russian coal exports in 2021 was shipped to Europe, according to S&P Global, with Panamaxes the predominant carriers.

"Coal exports to Europe from key Russian ports are [of] short duration compared to other exporting countries, meaning larger ton-mile when buyers replace Russian supplies," a shipowner source said.

Russian Atlantic coal shipments have been dominated by Baltic ports and while some owners have already avoided sending their vessels to Russia altogether, others have been requesting premiums of around $2,000/day to enter Russian ports, market sources said.

While more coal being delivered into Europe from other supplying countries will initially boost ton-mile demand, market sources said that trend will result in more vessels opening around Europe and pressuring trans-Atlantic and front-haul freight rates, market sources added.

Europeans seek alternatives

The ban on Russian coal imports came at a time when several EU member states have been relying heavily on the Russian energy sector to meet their growing needs, and the ban will likely create volatility in coal trade flows, especially in the thermal coal market, market sources said.

Russia is the primary source of thermal coal for European utilities, accounting for 33 million mt of imports in 2021, more than half of all European thermal coal imports, according to S&P Global data.

Buyers across Europe had been seen looking to increase supply of non-Russian coal for several weeks now, either in anticipation of such a ban or because they decided to self-sanction, market sources said.

"Some buyers have already decided to self-sanction and exclude Russian cargoes from their orders," a second broker said. "Trade flows have already started to change, with some buyers rejecting Russian cargoes and rerouting their vessels."

Buyers have been purchasing cargoes from as far afield as Australia and Indonesia, while increased flows from South Africa and Colombia were also seen, sources said, with buyers discussing more long-term deliveries as well.

As a result, Australian and Indonesian back-haul shipments to Northwest Europe and the Mediterranean have already been increasing, sources said, and were expected to remain so as the market readjusts to changing trade flows.

However, the long-term viability of that was uncertain given that producers all had their own supply issues, and any increase in spot demand from China or India would most likely soak up any availability, sources said.

The EU is not the only region imposing a ban on Russian coal, with the G7 -- Canada, France, Germany, Italy, Japan, the UK and US -- saying April 6 they would all be "phasing out and banning Russian coal imports".

The UK said April 6 it was planning to end all dependency on Russian coal and oil by the end of 2022 and end imports of gas as soon as possible.

Japan's Prime Minister Fumio Kishida said April 8 the country would also be reducing coal imports in phases and was looking to quickly secure alternative solutions.