The European Union (EU) is set to approve a ban on Russian coal that would take full effect from mid-August, a month later than initially planned, following pressure from Germany to delay the measure. It will be the EU’s first ban on imports of energy from Russia since the start of Russia’s invasion of Ukraine on February 24. Imports of coal from Russia accounted for 47 percent of the fuel coming into the European Union in 2019, making Russia the most important supplier of coal. That amounts to 4 billion euros ($4.36 billion) worth of coal annually.
Germany is one of the most dependent countries in Europe on Russian energy, having ignored President Trump’s warning against growing dependence. About half of the coal that Germany imports comes from Russia, totaling €2.2 billion last year. Most of the coal is used to generate electricity and power Germany’s steel industry. In 2021, due to less wind resources than expected, coal generation in Germany increased by almost 5 percent. Lignite, or brown coal, used to generate electricity in Germany is the only fossil fuel that is still mined there.
The EU Commission had initially proposed a wind-down period of three months for existing contracts, meaning that Russia could effectively still export coal to the EU for 90 days after sanctions were imposed. That period was extended to four months, due to pressure mostly from Germany, the EU’s main importer of Russian coal.
Most of EU’s coal contracts are short term, and a wind-down period of 90 days would have allowed most of them to be concluded without the need for cancellation. Much of Europe’s buying of Russian coal is in the spot market, rather than long-term contracts. Those spot purchases are expected to be halted immediately after sanctions are imposed. EU’s ban on Russian coal is more ambitious than Britain’s, which is planning to ban coal imports from Russia by the end of the year.
The EU sanctions also include banning Russian vessels from EU ports, as well as Russian and Belarusian road transport operators, effectively preventing their trucks from moving goods into the European Union.
Europe’s Coal Imports
In March, European countries imported 7.1 million metric tons of thermal coal, which is used in power and heat generation, a 40.5 percent increase year-on-year and the highest level since March 2019. Of that amount, 3.5 million metric tons came from Russia—the highest monthly total since October 2020.
Thermal coal imports from Colombia totaled 1.3 million metric tons in March, increasing by 47.3 percent year-on-year. Coal imports from the United States totaled 809,000 metric tons in March, increasing by 30.3 percent year-on-year and at their highest level since October 2019. Coal imports from South Africa were 287,000 metric tons in March 2022, having no shipments in March of 2021. Australia shipped 537,000 metric tons of thermal coal to Europe in the first quarter of this year, versus no shipments over the same period in 2021, having provided almost one-third of the EU’s coal imports in 2019. Indonesia and Australia, two of the world’s top coal exporters, have hit their production limits and are unlikely to meet Europe’s demand for additional supplies.
Poland is the EU country that relies most heavily on coal. While much of the country’s coal is mined domestically, about 20 percent was imported from Russia last year. Last month, Poland’s Prime Minister, Mateusz Morawiecki, proposed legislation to ban imports of coal from Russia.
Greece is expected to ramp up coal mining in the next two years as a “temporary” measure to help reduce dependence on natural gas. Like Germany, Greece is rich in lignite.
Europe also needs supplies of metallurgical coal, which is used for steelmaking. Australia’s Coronado Global Resources, with metallurgical coal operations in the Australia and the United States, is expected to meet some of that new demand.
The new trade patterns will push global coal prices higher, incentivizing some countries, like China and India, to produce more coal domestically rather than transferring larger sums to foreign nations.
Coal Prices Rise on EU Sanctions
Coal prices in Asia jumped due to Europe’s move to ban Russian imports of coal. Russia is the third-largest supplier of thermal coal and as noted above dominates sales to European nations. As a result of Europe’s sanctions on Russian coal imports, there will be increased competition in seaborne trade that has already experienced price swings this year as coal has filled gaps in fuel demand due to shortages of natural gas and low resources of wind and hydro.
Newcastle coal futures for April recently jumped 6.4 percent to $281 a ton–the biggest gain in almost two weeks—and similar gains were experienced in Europe. Prices are expected to continue to increase as European consumers seek alternatives to Russian coal. Miners in Indonesia, the top shipper of coal for power stations in Asia, have been approached by potential buyers from European countries including Italy, Spain, Poland and Germany.
A lack of investment in new capacity and relatively strong demand in Asia leaves the market short of filling the gap left by cuts to Russian coal exports in Europe. Russia accounted for about 18 percent of global exports in 2020. Even before the new sanctions were announced, energy companies in Europe and some parts of Asia were avoiding additional purchases of Russian fuel, and seeking alternatives, in anticipation of further government measures against Russia. Europe and Asia have been hit the worst, with skyrocketing prices, but there are also threats of power shortages in emerging nations like Pakistan.
Asian coal prices had declined from a record over the last several weeks, due to the recent COVID lockdowns in China — Asia’s top energy consumer — curbing factory activity and lowering fuel demand. Nonetheless, benchmark prices are more than two-and-a-half times higher than a year ago. China’s coal imports from Russia were almost halved in March from the previous month with discussions between Chinese importers and Russian miners last month focused on overcoming a lack of transport capacity, coal quality and obstacles to cross-border payments.
The EU is set to sanction coal imports from Russia, which will result in higher prices as the coal market is already tight from filling the gap created by natural gas shortages and poor resources of wind and hydropower. Germany is the European country most affected as it gets half its coal imports from Russia. European countries are already discussing other alternatives to Russian coal supply, which will change seaborne trade patterns, given that the world’s coal export suppliers consist mainly of Australia, Indonesia, the United States, Columbia, and South Africa. Despite huge resources of coal worldwide, and particularly in the United States, there has been little or no new capacity investment, due to climate change issues related to phasing out coal. The exceptions to that are in India and China, both of whom are investing in increased coal mining capacity to meet their growing demands for energy.