By Helmo Preuss
South African coal exports have gained from the impact of the Russian invasion of Ukraine on February 24 and that trend is likely to continue in the medium term, Alex Thackrah, the editor of Coal Daily International told the Argus Coal Forum in Sandton.
“European demand for thermal coal is up 27% so far this year as European utilities replace Russian coal, while there has also been some switching by utilities from natural gas to coal. There is currently some weakness in the coal price as both coal and gas stocks are high, so whether this is the calm before the storm or the start of a decline, will depend on how severe the winter is in Europe,” Thackrah said.
The Russian invasion of Ukraine has been a game changer for the industry as coal export prices have almost quadrupled and European countries have looked to reduce their reliance on Russian coal and gas supplies.
Over the past year, Russia cut its gas supplies to EU states by 88%, according to David Fyfe, the chief economist with research firm Argus Media, which meant that wholesale prices of gas in Europe have more than doubled over the same period.
The EU has already adopted a raft of measures to mitigate the crisis, including a pan-EU deal to cut gas usage by 15%.
Before Russia invaded Ukraine, Germany relied on Russia for 55% of its gas. It has reduced this to 35% and wants eventually to reduce imports to zero, so the switch to South African coal imports is a multi-year trend. Germany is also increasing its use of coal and extending the life of coal-fired power stations that were due to shut, despite the negative environmental impact.
Last year, Russia supplied Europe with 40 million tons of coal. More than 85% of the South African coal exported last year, or 50.7 million tons, went to the Asian countries of India, Pakistan and China and only 2.3 million tons went to European countries.
South Africa is one of the key alternative sources for European buyers.
In the fourth quarter this year, the share of South African coal exports going to Europe could be as high as 50% as South African coal producers switch to more expensive high calorific value (CV) coal from the low CV coal used by Indian and Pakistani consumers.
However, a continuation of low rail shipments due to parastatal Transnet’s subsidiary Transnet Freight Rail’s woes into the fourth quarter could worsen the European supply risk.
Transnet Freight Rail’s rail infrastructure has faced several headwinds, from a problem with spare parts, to vandalism and cable theft, among others.
However, the August 31 deal between Transnet and China’s CRRC E-Loco for the resolution of all current legal disputes between the two companies, should provide access to the spare parts and components and would allow Transnet to bring back to service 53 Class 20E and 67 Class 21E locomotives, which have been standing idle as a result of the inability to access the required spares and components. This should ease the rail restrictions only next year, rather than this year.
But the current Transnet strike will hamper coal exports via rail and South African ports, so coal producers will switch to the alternative of road transport to Maputo.
Coal producers have already moved some of their shipments to road, so smaller coal export ports such as Maputo and Durban have seen a rise in their coal exports.
Argus expects thermal coal exports from South Africa to rise to 70 million tons this year and 74 million tons next year, from 64.9 million tons last year.
Given the problems with Transnet Freight Rail shipments to Richards Bay Coal Terminal (RBCT), non-RBCT ports could double their share of South African coal exports to 16 million tons this year from eight million tons last year.
In response to a question from the audience, Thackrah said South Africa’s perceived support of the Russian invasion would not have an impact on European demand for South African coal, as the need to replace Russian coal was of a more immediate and medium-term concern.
Helmo Preuss is an economist at Forecaster Ecosa.
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