A Changing Reality for the European Coal Trade
Europe is rapidly heading for the deadline when the EU sanctions on imports of Russian coal become terminal. Imports have been allowed since the sanctions were announced a few months ago, but only under existing contracts, and no new deals were allowed to be signed. However, as of the tenth of August, that loophole will be permanently closed, and no Russian coal will be allowed to be discharged in the bloc’s ports. Like natural gas, Russia has traditionally been one of Europe’s primary sources of the dirtiest of fossil fuels, and the total embargo will add to the continent’s energy woes amid unreliable flows of gas from the east.
Thermal coal has reemerged as an increasingly important part of Europe’s energy mix, with the development pre-dating the Russian assault on its western neighbour. The squeeze on global energy supplies during the second half of last year saw the continent taking some steps to reverse parts of its decarbonisation achievements. However, the war in Ukraine and subsequent sanctions and disruptions have turbo-charged the process, with Europe being forced into a partial re-carbonisation. Previously mothballed coal-fired powerplants have been given a new lease on life, and restrictions have been lifted to accommodate the increasing use of coal for power generation.
According to Shipfix’s trade flow data, European coal imports had been in a state of decline for several years, bar a few seasonal upticks during the fourth quarter. However, the extensive squeeze on global energy supplies last year as the global economy recovered following the pandemic saw the continent’s appetite for coal rebounding sharply amid insufficient supplies of oil and gas. However, after a build-up of inventories during parts of the third and fourth quarters, volumes assumed their regular seasonal pattern and decreased during the early parts of the year. The seasonality came to an abrupt end with the Russian invasion of Ukraine as European buyers grew increasingly wary of disruptions to deliveries of gas, oil and coal from Russia. Since the low in February, European import volumes have recovered in a fashion not too dissimilar from what was observed in August and onwards last year. The early recovery in European imports could signal ever-increasing volumes during the remainder of the year and lend further support to the already high thermal coal prices.
With Russian coal rapidly becoming out-of-bounds, the big question is how will European buyers replace it, especially as requirements also look set to increase. The convenience of having its largest supplier next door has meant that time spans and sea voyages were relatively short, with the new development providing additional challenges with longer lead times and greater planning ahead as any replacements will be found at more distant shores.
Nevertheless, cargo orders for coal loading in Russia for European ports have declined in recent months amid a combination of official sanctions and self-sanctioning among European buyers. In the early stages of the war, ordering activities spiked as many European buyers expected either disruptions or sanctions and wanted to ensure adequate supplies for the short-term. However, since then, monthly volumes have been well below what has previously been recorded. Despite some last attempts to import Russian coal ahead of the embargo, volumes in July remain low. With no orders so far this week, it is unlikely that it will grow much more, as the window of opportunity for further legal imports is rapidly closing.
The tight global supplies, with much of what is produced already committed to long-term contracts, have seen European utilities scouring the global market for additional supplies. Still, there has been no single source of supply that could fully replace the Russian coal. While there has been some political pressure on US miners to increase production as the US administration sought to isolate the Russian leadership internationally, the shipments from US ports have only seen limited increases according to trade flow data.
In the early stages of the war in Ukraine, when the European dependence on Russian-sourced energy commodities rapidly became a liability, there was much hope that Australia would be able to increase shipments of high-quality coal to Europe. However, despite growing overtures from European buyers, the Australian miners’ production was mostly tied up in long-term contracts, and there was precious little spare capacity available. Hence, ordering activities for coal cargoes loading Downunder for European ports have remained subdued year to date.
In contrast, the flow of coal from South Africa to Europe has been rising since the Russian assault on Ukraine began. The country’s exports to Europe started to recover last year after a few years of limited shipments. However, the African nation’s problems with civil unrest and an extensive Covid-outbreak have resulted in monthly volumes being unpredictable. The cargo order volumes have been rising since the second half of last year, but the outbreak of hostilities in Ukraine saw the process accelerating. Hence, more South African coal can be expected to be discharged in European ports later in the third quarter.
Similarly, Colombia saw its coal shipments to Europe declining some years ago as the continent embarked on its decarbonisation path. However, last year’s energy squeeze saw a renewed European interest in Colombian coal. While it wore off somewhat in the early parts of the year, it has since recovered with rising European imports originating in Colombia. As for South Africa, order volumes remain strong, and a continued robust flow of Colombian coal can be expected to reach European shores during the coming months.
In addition to increasing delivery times and tight global supplies, European customers will also face challenges with different quality levels of the commodity, with some not suitable for European needs. Indonesia, one of the world’s largest exporters of coal, is a notable example as its coal often is of lower quality. However, recent months have seen order volumes for Indonesian coal to be shipped to Europe increasing, a development that potentially highlights the challenges that Europe are facing in its race to replace coal from its eastern neighbour.
For dry bulk shipping, the European move to abandon its reliance on Russian coal will prove beneficial as the alternative sources will require longer sea voyages. In light of weakening global growth and potentially lower commodity demand, the prospect of more tonne-mile demand in the European bound coal trade will provide additional support for freight rates. However, the longer voyages may shift the tonnage demand towards larger vessels, with the smaller ones losing some ground. In addition, higher coal prices could potentially put a dent in the demand for the commodity and offset some of the tonne-mile gains.
