Russian coal sanction portends problems for the global market

(Bloomberg) Europe is taking a big risk as it moves to ban Russian coal, which could leave it vulnerable to shortages and blackouts while the rest of the world faces rising prices.

Russia is Europe's leading supplier of thermal coal, which is used to power power plants. As the European Union joins the United States in taking a tougher stance against Vladimir Putin's war in Ukraine, the continent formulates plans to phase out Russian shipments. The problem is that there is no clear alternative to that much of the trade, and the result seems destined to lead to a domino effect that would create a frenetic global race for coal.

In a market that has been tight for months, prices start to skyrocket. European coal rose 14% on Tuesday to a high of three weeks after news of a proposed ban broke. The benchmark for Asian coal reached an all-time high in March, while US coal last week exceeded US$100 per ton for the first time in 13 years.

“The proposed sanction would be devastating for European coal imports,” said Fabian Ronningen, an analyst at Norwegian consulting firm Rystad Energy. “Some of the coal can be sourced from other markets, but overall, the world market is also very tight.”

It's not just that supplies are scarce. There are also logistical complications when talking about abruptly switching to new suppliers. Russia's proximity to Europe has long been one of its advantages in a market that relies on heavy cargo shipments lasting several days. Now, European buyers will have to look elsewhere, expanding the offer from countries as far away as South Africa, Australia and Indonesia, where quality varies.

“Russian coal is the closest, cheapest and, in some markets such as Germany, the most appropriate specification, in terms of heat and sulfur content,” said Jake Horslen, analyst at S&P Commodities Insights. An EU ban “would pose a major challenge for buyers who would have to look for alternatives,” he said.

In the long run, the outlook is not good for coal, the dirtiest fossil fuel. But right now, the market is booming, as Europe faces a crisis in natural gas supply and fuel consumption increases with the pandemic recovery. Global carbon emissions from the electricity sector rose to a record last year, partly driven by increased coal burning, according to expert group Ember.

Increasing coal production to meet demand has been a challenge. The market has been affected by rail disruptions, covid-19 and even a temporary export ban from Indonesia, the world's largest exporter.

“The Russian coal supply disruption is just the latest in a wave of supply problems that have plagued the market since the beginning of last year,” Bank of America Corp. analysts wrote in a note this month.

Any sanctions on Russian coal will put pressure on Europe's already scarce supplies. Coal stored in the ports of Amsterdam, Rotterdam and Antwerp remains at the lowest levels of the season in at least six years, according to a weekly stock survey conducted by Argus Media.

Europe buys two types of coal from Russia: thermal, which is used in power plants, and metallurgical, which is used in steelmaking. The Russian share of imports of thermal coal from the EU is almost 70%, with Germany and Poland particularly dependent.

The continent has become increasingly dependent on Russia as its own production declined. In 2020, Europe sent 57 million tons of thermal coal from Russia, the vast majority of imports, according to the International Energy Agency.

Original Note:

Europe's Russia Coal Ban Foreshadows Higher Global Energy Prices

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