China needs Russian coal. Moscow needs new customers

China’s 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 skyrocketed 64% in 2021 and domestic production reached a record 4.13 billion metric tons. This year, these figures are expected to be even higher, as President Xi Jinping prioritizes investments in infrastructure to revive the economy.

Last month, Chinese imported a record 1.09 million metric tons of seaborne coking coal from Russia, up 10% from April last year, according to Matthew Boyle, principal dry bulk analyst at data firm Kpler. Coking coal is used to make steel.

First there was a dip

Coal trade between China and Russia dwindled shortly after Moscow invaded Ukraine in February and Western countries began slapping unprecedented sanctions on Russia. Chinese banks were initially reluctant to provide financing for the purchase of Russian commodities, according to Reuters.

“After Russia began the assault, Chinese buyers and many others initially scaled back purchases to assess the risk of secondary sanctions,” said Lauri Myllyvirta, senior analyst at the Center for Research on Energy and Clean Air, a US-based think tank. in Helsinki.

By March, that reluctance had evaporated.

“When it became clear that the EU was not moving fast to ban imports, and that effectively prevented both the US and the EU from imposing broader sanctions that would affect other buyers, there was a jump in purchases as a result of the latent demand”, Myllyvirta. saying.

Since then, the European Union has approved a ban on Russian coal, which will take effect from August. Earlier this month, he also proposed to ban all imports of Russian oil within six months.

get it cheap

China is not only buying a lot of Russian coal now, but also buying it at a deep discount.

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

“In recent months, the sanctions have created a marked bifurcation of the global seaborne coal market, as many importers are now unable or unwilling to import coal from Russia,” said Toby Hassall, principal analyst at Coal Market Research at the London Stock Exchange. Group.

As the pool of buyers gets smaller, those 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.

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

Price discounts have persisted this month.

Late last week, Russian coking coal at ports in northern China averaged around $439 per metric ton, according to Hangzhou-based data provider Hithink Flush Information. Australian coal is $512 and Chinese coal is $496.

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

“So far, the government seems to be following a line of maintaining friendly relations with Russia without encouraging or directing Chinese companies to increase business with the country, and discouraging anything that might conflict with the sanctions imposed on China,” Myllyvirta said.

“This line means China’s imports from Russia are likely to grow simply on a market basis as other buyers move to embargo Russian fossil fuels,” he said.

Why does China need so much coal?

Despite promises to reduce its dependence on fossil fuels, China still needs coal to boost its economy. Up to 60% of China’s electricity production was generated from thermal coal in 2021, while more than 90% of Chinese steel was produced in blast furnaces burning coking coal. Overall, coal accounted for 56% of China’s total energy use last year, according to the National Bureau of Statistics.

“Currently, the Chinese government is pushing all kinds of infrastructure and construction projects, which include coal industry projects, to offset the effect of the real estate slump and Covid lockdowns in other parts of the economy,” he said. Myllyvirta.

China has been trying to boost coal production since last year, when a severe power crisis caused blackouts in millions of homes and forced many factories to cut output.

On Thursday, Premier Li Keqiang said a steady supply of energy is critical to China’s growth goals.

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

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The National Energy Administration has set Chinese mines a target of 4.4 billion tonnes this year, 300 million more than last year’s record output.

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

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

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

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

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