The gaining momentum in the API2 market rally, which we repeatedly forecasted, is an obvious outcome of the tightening coal supply on the market over the past months, including a drop in the Russian seaborne coal exports in H1 2024 by 13 mio t, or 13% vs. H1 2023.
Will Russian suppliers manage to capitalize on the uptrend and increase spot shipments?
Some experts await higher supply of Russian coal (in particular, to the Mediterranean market, Turkey and Egypt) to help cool down the surge in European indices.
However, additional coal deliveries from Russia in the near and medium term are completely unavailable. Russian suppliers have been experiencing tough export challenges since the beginning of the year, including logistical constraints, high production costs, and international sanctions, forcing most producers to export coal at zero or negative margins.
Following rail limitations on all export routes, Russian coal volumes are completely sold out until September-October 2024. Supply of Russian material to sea terminals in the Northwest and South, as well as at Far Eastern ports, has significantly declined over the past months, caused by the growing severe restrictions on coal shipments by Russian Railways (RZD).
RZD agrees rail shipments of coal with significant cuts against the stipulated rates at load ports. In August 2024, the volume of coal deliveries to the ports of the Far East and the North-West was agreed by RZD at no more than 60% of tonnage from the fixed rates.
For the ports of the South, this percentage did not exceed 30%. For the port of Taman, RZD agreed 1.2 mio t, compared to the average monthly shipments of 2.5 mio t in 2023. The total backlog of agreed volumes from the stipulated rates in August amounts to 14.6 mio t.
Considering the current Russian railway capacity and actual shipping volumes in 2019 and 2021, Russian exporters undersupplied the world market with 20 mio t of coal in January-June 2024.
Meanwhile, Russian exporters were counting on improved rail freight volumes in June-August (at least at the level of 2023), thus tonnages were sold out amid insufficient coal storage capacity and the necessity to ensure imports against the agreed schedule with vessels, which need to be chartered in advance. Significant reduction in rail shipment plans for June-August by RZD forced suppliers to shift fulfillment of their obligations to customers, who will have to enter the spot market for replacement of the dropped Russian tonnage.
More than half of Russian producers have suffered losses since the beginning of the year, causing a shortfall in investment funds, resulting in a further coal production decline, falling exports and rising global prices.
It is also important to consider the drop in Russian coal export supplies in 2024, given the volumes of about 60 mio t from the leading Russian coal producers SUEK, Mechel, Sibanthracite, Elga, Coalstar and Mairykhsky Razrez, which fell under blocking sanctions. If the sanctions regime remains in place, about 80-90 mio t of coal will not reach the market in 2025.
Moreover, Colombian coal supplies are currently limited because of heavy rains through the country, negatively affecting Drummond’s coal production. Colombian miners are likely to face even heavier showers this year. Thus, for the first time in the last two years, Colombian coal was sold to Turkey at a discount to Russian material through the Icdas tender. Based on our data, the discount amounted to at least 3 USD/t, which is noteworthy, given the opposite trend since 2022. Meanwhile, this week Egyptian customers were bidding to Russian suppliers at 110 USD/t CIF.
Thus, in the next 2-4 weeks the pressure on the market will only intensify. Contrary to expectations of additional Russian tonnage on the market on a growing trend (what is technically impossible for the reasons mentioned above), the opposite scenario would unfold with consumers from Turkey, Egypt, Morocco and other countries entering spot market, resulting in further price hikes and a stronger rally on the market, given the tightness of supply caused by delivery constraints.
Source: CCA Analytics
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