The Russian invasion of Ukraine had worldwide implications for many sectors – not least that of the mining industry – sparking off months of volatility and high pricing in the commodities markets. However, as damaging as the war has been for the world, the international response had a considerable affect on Russia and its coal miners. Andrew Tunnicliffe speaks with Natalie Biggs, global head of thermal coal markets at Wood Mackenzie, to learn how the war has disrupted supply chains and what effect, if any, global sanctions have had on Russian coal exports.
The Russian-Ukraine war has impacted the supply chains in coal sector. (Credit: Анатолий Стафичук from Pixabay)
As Russia’s stalled campaign in Ukraine rumbled into its second year, Vladimir Putin ordered a “partial mobilisation” of male citizens. His call was met with shock from many Russians, either fearing the prospect of going to war themselves or of losing a loved one in a seemingly futile conflict. Of course, some would have welcomed the call, likely the result of overenthusiastic optimism or misguided patriotism.
As that news broke, so too did speculation that letters had begun landing on the desks of Russia’s energy company chiefs, emblazoned with the Russian crest and ‘Ministry of Energy’. It was reported they contained an order from Putin, signed by Deputy Minister Pavel Sorokin, for the majority of male employees to attend military draft offices across the country in the coming two weeks.
Word rippled across social media – first via users of instant messaging service Telegram, then Twitter, before being picked up by some mainstream outlets. Right now, the veracity of that news remains unclear, particularly given that one of the original sources has since said it was a hoax. Fact or fiction, one thing is certain: Russia’s mining sector was already facing a skills shortage – like many other nations – and could probably ill afford to lose more labour. Any additional constraints on labour would disrupt coal supplies at the worst possible time, as winter approaches. While such problems would have a global impact, it’s important to not underestimate the domestic complications it presents too. “There’s a lot of domestic demand,” says Natalie Biggs, global head of thermal coal markets at Wood Mackenzie.
Supplying the world, for now
In 2021, the country produced 438 million tonnes (mt) of coal – 336mt was thermal, used in energy generation, and the remainder was coking coal, used mainly in steelmaking. Around a third of thermal was used domestically, heating and lighting homes and businesses either through power plants or used independently. Speaking during the summer months, even then acknowledging falls in extraction, Energy Minister Nikolay Shuvalov sought to reassure Russians, telling them that domestic supply would be maintained. “It’s quite possible that this will end up being true, however, given falling coal export, given falling coal export figures, and extractions themselves, seen in recent months.
Demand from international markets has fallen significantly as countries respond to Russia’s illegal invasion of its neighbour. However, until late February, Russia was a major global supplier, capitalising on its known 15% of global reserves of coal – second only to the US at 23%. In truth, despite the immediate collapse of many export markets, the country remains a major player, ranking sixth in worldwide production levels.
It will continue to be so, at least for several years to come, thanks to its mature and well-developed coal industry, a multitude of established coal mining companies and its access to high-grade coal. “The type of coal Russia supplies to international markets is a very high quality,” explains Biggs. “There’s a bit of a stickiness around that type of quality because the plants that burn that coal are specifically designed to take it.” Currently, Russia supplies around a quarter of the world’s high-grade coal, securing its place as a critical stakeholder thanks to the limited number of other purveyors.
So, despite the harsh words and doomsaying of what lay ahead for Russia’s coal industry from political leaders as they announced bans on its coal, the country continues to hold a prized position. In fact, even the EU delayed enacting the ban for four months after announcing it in April, showing Russia’s importance regarding the supply of coal. “There was this big buying spree of Russian coal into Europe, so they were trying to stockpile ahead of sanctions actually taking effect,” Biggs notes.
Aside from stockpiling for the short term, though, the ban was arguably largely symbolic – demand for coal from Europe had already been falling for some time. “The traditional buyer of Russian coal has been Europe,” says Biggs. “But Russia knows that the European coal demand is declining. Europe has a very aggressive coal plant retirements schedule and so Russia has been trying to pivot, going from the West over into eastern markets.”
The eastern line
Russia’s ambitions to become a major supplier to Asia–Pacific (APAC) markets have been long held, supported by investment in infrastructure, including expansions to the Trans-Siberian and Baikal-Amur Mainline railroads and other logistics projects, and a massive programme of new mine development and processing facilitates.
In 2020, the Russian Ministry of Energy said it planned to increase coal production by two-thirds of current levels by 2035, at the same time doubling exports. This was largely through eastern markets and an effort to capitalise on Russian reserves before carbon neutral initiatives put paid to any further expansion there too. This was all, of course, before the invasion of Ukraine; although that has perhaps expedited the closure of Western markets and proved APAC will likely be a valuable destination for Russian coal now. It’s clear that no matter what the West says about Russia’s coal, there will remain an insatiable appetite for it in some parts of the world.
The Middle East, India and – more lucratively – China responded to Western bans by increasing their imports. By July and August, China – which was already the biggest market for Russian coal, accounting for a quarter of all exports – was buying around €8m worth of coal per day more than at the start of the conflict, according to Statista. Between them, China and India bought up €4.5trn worth in the first eight months of the war. S&P’s Commodities at Sea database showed that year-on-year seaborne coal deliveries to China were up by as much as 55%.
However, that thirst might still be tempered. Where sanctions are having a degree of success is in limiting the available routes to market and access to eastern customers, says Biggs. “Right now, [Russia is] basically at the limits of capacity to move coal to the east,” she says, adding that the European stance on the movement of Russian goods is making things more difficult. As a result, shipments are having to be routed via the sea, leaving north-western ports on their way to China, India and other parts of Asia, North Africa and Turkey.
This, along with other sanctions aimed at having direct and indirect financial consequences – such as increased shipment rates and insurance premiums – have left Russian coal producers facing increased costs. This comes at a time when Russia is having to sell coal at a reduced rate – sometimes at a 50% discount – brought about as a measure to stimulate sales in the face of international bans.
Questioning how sustainable it might be in the long term, for now, Biggs says these discounts are helping keep Russian coal exports going, despite the high freight costs. She says that thanks to the historically high price of coal and the discounts Russia is offering, “it makes a lot of sense” for countries willing to import Russian coal to ship it – even from Western ports, paying the ocean freight cost all the way back to specific markets. “It’s quite a large cost to do that kind of shipment but at the moment, where prices are, it’s a drop in the bucket,” she adds.
In the immediate to mid-term, the situation for Russian coal exporters looks fairly stable. If they can continue offering discounted shipments there will likely be buyers, given coal prices are set to remain high for the foreseeable future. That pool may be drying up, though, with perhaps just China and India left, as customers decide to look elsewhere. Japan has banned Russian coal imports while utilities in South Korea and Taiwan are self-sanctioning by ending the use of Russian coal. Due to their longer forecast for coal generation and coal imports, says Biggs, this could be a problem for Russia. “If they decide to keep sanctions in place for longer, I think that’s going to hurt Russia.”
High grade, high risk
For now, though, high market prices, discounted shipments and the scarcity of the high-grade – high calorific and low-sulphuric value – coal that Russia supplies means we’ll continue to see it operating on the international markets. Even now, with huge swathes of the populated world not even yet in the depths of winter, markets are desperate for high-grade coal, says Biggs. “Replacing Russian coal on the international market is a huge deal,” she adds. “And other suppliers – Australia, South Africa and Colombia – have all had no end of production issues this year. Australia is probably the biggest, because of flooding.”
As the world faces an El Niño season, weather-related events are possible and there is the potential for some difficult days ahead. “If Europe has a colder than normal winter, or if Australia gets hit by a cyclone, we could really see coal prices go much higher than what we’ve ever seen before,” Biggs fears. And if the two combine – a supply side event in Australia, for example, and increased demand in Europe because of a harsh winter – there is real potential for a winter energy crisis.
Biggs has one final warning for Europe, and for the energy sector more critically. She says the lack of being able to source suitable alternatives is already leading power plant operators to consider using lower-grade coal, a move she describes as “scary”. “Coal generators are actually looking at using metallurgical coal in order to make up for the loss; but metallurgical coal is really bad for burning, and for generators and boilers. […] They have to be desperate in order to use it,” she warns. For a world said to be moving away from coal, it says a lot from how the fossil fuel is still so easily weaponised by one side or another. What happens in the coming months is as uncertain today as it was the day Russian boots and bombs landed in Ukrainian territory.
The hope is the lights don’t go out in Europe – either because of a lack of coal or failed power plants – and that peace can once again be found. Until then, coal will remain a source of power – literally and metaphorically.
This article first appeared in World Mining Frontiers magazine.