Booming coal trade is a win-win situation for Russia and China

Chinese coal imports from Russia nearly doubled between March and April, reaching 4.42 million metric tons, according to trade data from Refinitiv. Russia has overtaken Australia as China’s second largest supplier since last year and now accounts for 19% of its coal imports, up from 14% in March.

Coal imports soared 64% in 2021, and domestic production reached a record 4.13 billion metric tons. This year, those numbers are expected to be even higher as President Xi Jinping prioritizes infrastructure investments to revive the economy.

Last month, China imported a record 1.09 million metric tons of coking coal shipped by sea from Russia, up 10% from April last year, according to Matthew Boyle, chief dry bulk analyst at the Kpler data company. Coking coal is used to make steel.

First there was a dip

The coal trade between China and Russia declined shortly after Moscow invaded Ukraine in February and Western countries began hitting Russia with unprecedented sanctions. Chinese banks were initially reluctant to fund Russian commodity purchases, says Reuters.

“After Russia launched the assault, the Chinese and many other buyers initially reduced their purchases to assess the risk of secondary sanctions,” said Lauri Myllyvirta, senior analyst at the Center for Research on Energy and Clean Air. , a Helsinki-based think tank.

By March, that reluctance had evaporated.

“When it became clear that the EU was not rapidly banning imports, and that this effectively prevented the US and EU from imposing broader sanctions that would affect other buyers, there was an increase in purchases resulting from latent demand,” Myllyvirta said. mentioned.

The European Union has since approved a Russian coal ban, which is expected to come into full effect from August. Earlier this month, he also offered to ban all Russian oil imports within six months.

Get it cheap

Not only does China now buy a lot of Russian coal, but it also buys it at a very favorable price.

Russia is the world’s third largest coal exporter and world prices for the raw material have surged since it invaded Ukraine. The price of ICE Newcastle coal futures are up more than 40% since early March.

“In recent months, sanctions have created a sharp bifurcation of the global marine coal market, as many importers are no longer able or unwilling to import coal from Russia,” said Toby Hassall, senior analyst for Coal Market Research in London. Stock Exchange Group.

As the pool of buyers shrinks, importers who are able and willing to buy coal from Russia are “paying much lower prices for this supply compared to coal from other origins,” Hassall said.

China mined a record amount of coal in 2021. It could produce even more this year

In April, Russian premium coking coal delivered to the port of Jingtang in northern China was priced at 2,710 yuan ($403) per metric ton, according to Chinese industry data provider MySteel. . That compares to $475 for US coking coal reaching the port and $423 for coal mined in China.

Price discounts persisted this month.

As of the end of last week, Russian coking coal in northern Chinese ports averaged about $439 per metric ton, according to Hangzhou-based data provider Hithink Flush Information. Australian coal cost $512 and Chinese coal $496.

For Beijing, buying more from Russia is not only a friendly gesture towards Moscow, but also a smart move that benefits China’s economic needs.

“So far, the government seems walk in a line to maintain friendly relations with Russia without encouraging or directing Chinese companies to increase their business with the country, and discouraging anything that might run counter to the sanctions imposed on China,” Myllyvirta said.

“This line means that Chinese imports from Russia are likely to grow simply based on the market as other buyers decide to embargo Russian fossil fuels,” he said.

Why China Needs Coal So Much

Despite the promises To reduce its dependence on fossil fuels, China still needs coal to fuel its economy. Up to 60% of China’s electricity generation was generated from thermal coal in 2021, while more than 90% of China’s steel was produced in blast furnaces that burn coking coal. In general, coal accounted for 56 percent of China’s total energy consumption last year, according to the National Bureau of Statistics.

“The Chinese government is currently pushing for all sorts of infrastructure and construction projects, including coal industry projects, to offset the effect of the real estate crisis and Covid lockdowns on other parts of the economy,” Myllyvirta said.

China has been trying to boost coal production since last year, when a severe electricity crisis faults triggered for millions of homes and forced many factories to reduce production.

On Thursday, Premier Li Keqiang said a steady supply of electricity was essential for China’s growth targets.

China will “resolutely” prevent any electricity crisis from happening again this year, Li said during a visit to a power transmission center in Yunnan Province, China.

China and India face a deepening energy crisis

The National Energy Administration has set a target for Chinese mines of 4.4 billion tons this year, up 300 million from last year’s record output.

And in another effort To secure supply, the government reduced all import duties on coal to zero between May 1 this year and March 30, 2023. Previously, tariffs ranged from 3% to 6%, depending on the type of coal. coal.

Indonesia, China’s current top supplier, has enjoyed zero tariffs for years thanks to a free trade pact between China and ASEAN countries. But Russia was still subject to tariffs until this month.

“We estimate a 30% increase [Russia’s] export volume to China at 71 million tonnes this year from 55 million tonnes in 2021,” Morgan Stanley analysts said in a research note last month.

A new bridge between China and Russia could help. the first railway bridge linking the two countries was completed last month. the 2,215 meters long The bridge will mainly be used to transport coal, iron ore and other goods from Russia to China, according to Chinese state media.

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