European coal ban in Russia portends higher global energy prices | 2022-04-06

Europe is taking a big gamble as it prepares to ban Russian coal, leaving itself potentially vulnerable to shortages and blackouts as the rest of the world grapples with soaring prices.

Russia is Europe’s leading supplier of thermal coal, used to fuel power stations. As the European Union joins the United States in taking a tougher stance against Vladimir Putin’s war in Ukraine, the continent is considering phasing out Russian shipments. The problem is that there is no clear alternative for this huge part of the trade, and the outcome seems destined to lead to a domino effect that creates a mad global rush for coal.

Prices are already soaring in a tight market for months. European coal jumped 14% to a three-week high on Tuesday after the proposed ban was announced, as futures have doubled since the start of the year. The benchmark for Asian coal hit a record high in March, while US coal topped $100 a tonne last week for the first time in 13 years.

“The proposed sanction would be devastating for European coal imports,” said Fabian Ronningen, an analyst at Norwegian consultancy Rystad Energy. “Some of the coal may come from other markets, but in general the global coal market is also very tight.”

It’s not just that supplies are limited. There are also logistical complications when it comes to quickly switching to new suppliers. Russia’s proximity to Europe has long been one of its advantages in a market that depends on heavy cargo shipments over several days. Now European buyers will have to look elsewhere, stretching the supply from countries as far afield as South Africa, Australia and Indonesia, where quality varies.

“Russian coal is the closest, cheapest and in some markets like Germany the most appropriate specification, in terms of calorific and sulfur content” to power European power plants, said S&P Commodities analyst Jake Horslen. Insights. An EU ban “would pose a significant challenge for buyers who would need to research alternatives”, he said.

In the long term, the outlook is not good for coal, the dirtiest fossil fuel. But right now, the market is booming as Europe faces a shortage of natural gas supply and rising fuel consumption in the pandemic recovery boom. Global carbon emissions from the power sector hit a record high last year, thanks in part to increased coal burning, according to think tank Ember.

Increasing coal production to meet demand has been difficult. The market has been hit by rail disruptions, COVID-19 outbreaks 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 issues that have plagued the market since early last year,” Bank of America Corp analysts wrote. in a note this month.

Any sanctions on Russian coal will put pressure on already stretched supplies from Europe. Coal stored in the ports of Amsterdam, Rotterdam and Antwerp remains at seasonal lows for at least six years, according to a weekly inventory survey by Argus Media.

Europe buys two types of coal from Russia: thermal coal, used by power stations, and metallurgical coal, used in steelmaking. Russia’s share of EU thermal coal imports is nearly 70%, with Germany and Poland being particularly dependent.

The continent became increasingly dependent on Russia as its own production dwindled. In 2020, Europe shipped 57 million tonnes of thermal coal from Russia, the vast majority of imports, according to the International Energy Agency.

Coal shipments

German energy company EnBW Energie Baden-Wuerttemberg AG said last month that it had started to diversify its coal purchases to reduce its dependence on Russia, and that a complete change would only be possible in middle term. The company, which depended on Russia for more than 80% of its coal last year, also said sourcing fuel from countries like Australia and South Africa would be more expensive.

And while the United States has stepped in to help wean Europe off Russian gas, it’s unlikely it can do the same with coal. The miners have already sold most of their production under long-term contracts and are unable to increase production as they have been closing mines for years. These issues have been exacerbated by a labor shortage and logistical challenges that make it difficult to get more tons from mines to ports.

“There are a lot of calls for U.S. exports, but getting them out of the country is tough,” said Andrew Blumenfeld, director of data analytics for market research firm McCloskey.

Even before the sanctions, European energy companies were already struggling to get their hands on Russian coal. Many banks refused to finance commodity trading, forcing some of the continent’s largest utilities to buy coal from South Africa and Australia.

An increase in exports from countries like Indonesia “could help offset the lost tonnage from Russia,” Bank of America analysts said, while warning that “it won’t make up for the difference in quality.”

“With supply issues aplenty, the market will need to balance out through demand destruction,” analysts said.

This is easier said than done, especially given the larger energy supply problems in Europe that have reverberated around the world.

Tight natural gas markets have created energy shortages at a time when wind and hydroelectricity are unreliable in some areas. Europe and Asia have been hardest hit, with soaring markets, blackouts in places like India, power shortages in China and the threat of blackouts in others. country. Energy prices have also climbed in the United States, but not to the same extremes.

Meanwhile, some analysts had cast a critical eye on the reliance of some European countries on Russia even before the current war in Ukraine. Germany, the Netherlands, Turkey and Poland together received almost a quarter of all coal exports from Russia in 2021, according to data from the US Energy Information Administration.

Around 10% of Germany’s electricity is generated by burning coal, and unlike neighboring France, the country has little nuclear power as a fallback option, with its last remaining plants due to be taken out of service this year as part of of a transition to more renewable energies. Yet Economy Minister Robert Habeck says Germany can get rid of Russian coal before the end of the year.

Russia’s reliance on energy more broadly limits Europe’s ability to impose sanctions on other fuels, according to Thierry Bros, a former energy analyst who is now a professor at the Institute of Political Studies in Paris.

“Due to Germany’s and Hungary’s too close relations with Russia, we are forced to ban coal only, which is a good first step but far from enough,” Bros. said.