The Russian war sparked a coal renaissance

Despite much talk about accelerating renewables, coal continues to dominate some markets. China is steadily increasing its coal production, while Indonesia is looking to export to new European buyers. And while many countries are imposing sanctions on Russian coal, India is now backing its imports of cheap Russian oil with cheap coal.

China’s daily coal production continues to rise, a 15% increase in production in March compared to the same period last year. This equates to approximately 395.79 million tonnes, or 12.77 million tonnes per day. This goes beyond China’s target of 12.6 million tonnes per day throughout 2022. China is keen to maintain high production levels due to uncertainties created in the supply chain in response to the Russian invasion of Ukraine.

The increase comes despite several new lockdowns being put in place across China following another Covid outbreak. Coal use in utilities has plummeted due to new Covid restrictions, allowing China to store some of this increased coal production. Coal inventories have fallen from around 22 million tonnes at several major utilities in April 2021 to 28 million tonnes this year.

And while China is increasing its production to ensure its energy security, Indonesia is seeking to fill the vacuum left by the sanctions against Russia by exporting its coal to Europe. The country’s second-largest coal miner, PT Adaro Energy Indonesia, exported about 300,000 tons of coal to European buyers in response to sanctions on Russian coal. While Adaro says it will maintain its current coal trading ties, European buyers may well look to Indonesia to fill the void.

CFO at Adaro, Lie Luckman, declared: “Indeed, there has been some demand from Europe, but our market is mainly Asia. We will focus on delivering on our commitments to our customers who already have long-term contracts with us.” The client list includes Japan, China, South Korea and India.

As part of its sanctions against Russian energy, the EU ban coal imports from Russia from mid-August. Governments in the region are now striving to secure their energy sources by seeking more import options and increasing domestic production of fossil fuels and renewable energy. Indonesian coal exports hit record highs in March, a trend that is expected to continue due to the sanctions.

The EU delayed its sanctions on Russian coal by about two months due to pressure from Germany, a major importer of Russian energy, to extend the period. In 2020, Germany imported around 21.5% of its coal comes from Russia, as well as 35.2% of its oil and 58.9% of its natural gas, which shows its strong dependence on the energy producer. While the EU is eager to impose sanctions in response to the conflict, it has not been an easy task and it recognizes the importance of ensuring the region’s energy security before completely cutting off Russia.

However, other countries are less firm in their condemnation of Russia and are using the situation as an opportunity to buy cheap energy. After acquiring cheap Russian oil, India is now eyeing affordable coal as other countries turn their backs on Russia.

India’s coal imports from Russia hit a two-year high in March. And analysts say India and China could continue to increase coal imports from Russia as it offers lower prices in response to the loss of other export partners. Russia sells its coal at around one Rebate of $60 to $65 per metric toncompared to Newcastle NAR coal 5,500 kcal/kg, making it increasingly attractive at a time when energy prices continue to rise to record highs.

Commercial Manager of Government Relations Consulting Firm Vogel Group Samir N. Kapadia Explain, “Despite warnings from the West, India continues to rely on its supply chain relationship with Russia for natural resources like oil and coal.” He thinks a rupee-ruble currency swap could help India circumvent sanctions on Russia, allowing them to continue importing coal at low prices. The White House is putting significant pressure on India to curb its imports, warning of potential consequences if it continues to support Russia.

India has had low coal stocks since last year, with several states across the country likely to experience power shortages. Although the government has announced its goal of stopping all coal imports by 2030, by increasing production from state-owned coal-fired power plants, it still relies heavily on foreign coal at present. It currently buys a large part of its coal from Australia, because its seventh trading partner. But if Russia continues to offer cheaper energy alternatives, it may be hard to say no.

Despite bold promises to switch from fossil fuels to renewable alternatives, new sanctions against Russia reveal the world’s continued reliance on coal. As European buyers look to Asian producers to meet their coal needs, others are quickly turning to Russia, putting low-cost energy above geopolitics.

By Felicity Bradstock for Oilprice.com

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