June 24, 2019, 00:25 / Business

The price of Russian coal in Europe has dropped to its lowest level in three years

This threatens companies with work at a loss Polina Trifonova

The cost of Russian coal supplies to Europe has fallen to its lowest level in three years / Andrey Gordeev / Vedomosti

The price of Russian thermal coal on the European market fell to its lowest level since June 2016 – $47 per 1 ton (FOB Riga).

This is below the break-even level of Russian coal companies. The average cost of Kuzbass coal (the region provides the country with 57% of thermal coal), taking into account the cost of delivery to the Baltic, is $50–55 per 1 ton, according to Ayrat Khalikov, director of the Center for Economic Forecasting at Gazprombank. He forecasts prices will remain low in 2019 and 2020.

The decline in prices is mainly due to the replacement of thermal coal with more environmentally friendly liquefied natural gas (LNG): in 2019, the commissioning of LNG production capacity exceeded the growth in demand for it, which led to a decrease in LNG prices and an increase in gas reserves in European storage facilities, he continues .

The fall in prices is a consequence of the warm winter in Europe and an excess of coal in warehouses, says a top manager of a large coal company. The price may rise by autumn-winter, but only slightly - up to $65-70 per 1 ton; low prices are a long-term trend, he believes.

Europe has long been reducing coal consumption due to an environmental program. In physical terms, shipments in the western direction in the first half of the year are still showing growth, but in the second half of the year they may already fall by 20–30%, a source from another coal producer is sure. Prices for thermal coal have fallen due to low prices for gas and the replacement of coal with it; as a result, most Kuzbass coals are no longer profitable, says Nikolai Sosnovsky, director of metallurgy and mining at Prosperity Capital Management: “Perhaps a decrease in prices for rail transportation and transshipment to the port will be able to improve the situation a little, but in general, at such prices the margin is minimal. In Asia, prices are a little higher, but there is a shortage of wagons there and supplies are limited – it won’t be possible to increase them much.”

Russia exports mainly thermal coal to Europe - 63 million tons in 2018. This is 42% of total exports, Khalikov cites data. Exports of coking coal do not exceed several million tons.

Small enterprises with lower quality coal that do not export concentrates will suffer the most from the fall in prices, says Maxim Khudalov, director of the ACRA corporate ratings group. The market is preparing for a repeat of the situation in 2016, when falling prices led to the bankruptcy of small producers. “Unlike the big players, smaller companies operate primarily through spot sales or sales to traders, and it will be difficult for them to quickly redirect European volumes to other markets,” he explains.

The largest coal producers in Russia - SUEK and UMMC (manages Kuzbassrazrezugol) - will suffer less from lower prices in Europe, but will be forced to work, if not at a loss, then on the verge of profitability, Khudalov believes. According to him, if previously they received about a $10 margin per 1 ton of coal sold to Europe, then at current prices this figure will drop to $2–3 per 1 ton. In addition to falling prices, competition in the European market is also intensifying, the expert recalls. Due to China's reduction in purchases of Australian coal and due to US President Donald Trump's active support for American coal exports, new flows of this raw material have poured into the European market.

But Russia has the opportunity to increase supplies in the Asian direction, Khudalov is sure: the cheap ruble allows Russian producers to play with the price and offer the Asian market high-quality coal at a price lower than that of other producers, and win due to volumes.

The situation can be improved by the development of the Eastern training ground of Russian Railways - the expansion of the BAM and the Trans-Siberian Railway, a source in the coal company believes. In 2020, carrying capacity in this direction should increase by 66 million tons, and by 2025 it will reach 210 million tons.

Representatives of SUEK and UMMC did not respond to requests from Vedomosti.