China needs Russian coal. Moscow needs new customers

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

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

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

First there was a dip

The coal trade between China and Russia dwindled shortly after Moscow invaded Ukraine in February and western countries began hitting Russia with unprecedented sanctions. Chinese banks were initially hesitant to provide financing for purchases of Russian commodities, Reuters said.

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

Russia is the world's third largest coal exporter and now China's second largest supplier after Indonesia.

By March, that reluctance had disappeared.

“When it became clear that the EU was not quick to act to ban imports, effectively preventing both the US and the EU from imposing broader sanctions that would hit other buyers, there was a jump in purchases due to latent demand,” Myllyvirta said.

The European Union has since approved a ban on Russian coal, which will come into full effect from August. Earlier this month, it also proposed banning all Russian oil imports within six months.

get cheap

China now not only buys a lot of Russian coal, it also buys it at a big discount.

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

“In recent months, sanctions have caused a sharp split in the global sea coal market as many importers are now unable or unwilling to import coal from Russia,” said Toby Hassall, chief analyst for Coal Market Research at London Stock Exchange Group.

As the number of buyers shrinks, those importers who can and want 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.  This year it may produce even more

According to Chinese data provider MySteel, the price in April was 2,710 yuan ($403) per tonne for the delivery of high-quality Russian coking coal to the port of Jingtang in northern China. That compares with $475 for US coking coal reaching port, and $423 for coal mined in China.

The price discounts have continued this month.

At the end of last week, Russian coking coal in the ports of northern China averaged about $439 per tonne, 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 to Moscow, but also a smart move that benefits China’s own economic needs.

So far, the government appears to be following a line of maintaining friendly relations with Russia without encouraging or directing Chinese companies to do more business with the country, and discouraging anything that could violate sanctions. imposed on China,” said Myllyvirta.

“This line does mean that China’s imports from Russia will likely only grow on a market basis as other buyers embargo on Russian fossil fuels,” he said.

Why does China need so much coal?

Despite pledges to reduce its reliance on fossil fuels, China still needs coal to power its economy. As much as 60% of China’s electricity production in 2021 was generated from thermal coal, while more than 90% of China’s steel was produced in blast furnaces that burn coking coal. According to the National Bureau of Statistics, coal accounted for 56% of China’s total energy consumption last year.

“The Chinese government is currently pushing for all kinds of infrastructure and construction projects, including projects in the coal industry, 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 ramp up coal production since last year, when a severe power crisis led to power outages for millions of households and forced many factories to cut production.

Prime Minister Li Keqiang said on Thursday that a steady supply of power is critical to China’s growth goals.

China will “resolutely” prevent another power outage this year, Li said during a visit to a power transmission center in China’s Yunnan province.

China and India face an ever-deepening energy crisis

The National Energy Administration has set a target of 4.4 billion tons for China’s mines this year, 300 million more than last year’s record production.

And in another attempt To ensure supplies, the government has cut all import tariffs on coal to zero between May 1 this year and March 30, 2023. Previously, rates ranged from 3% to 6%, depending on the type of coal.

Indonesia, the current number 1 supplier to China, has enjoyed zero tariffs for years thanks to a free trade agreement between China and ASEAN countries. But Russia was still subject to tariffs until this month.

“We estimate an increase of 30% [Russia’s] export volume to China to 71 million tons this year versus 55 million tons 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 connecting the two countries was completed last month. The 2,215-meter 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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