In 2023, China's imports of thermal coal (excl. anthracite) from Russia reached a record high of 58 million tonnes, surging 58.3% year on year. However, by the end of 2024, the imports are expected to decline to approximately 52 million tonnes, which is a 10% decrease compared to 2023. In the same time, the overall volume of thermal coal imports to China continues to rise. What is the primary reason for the decrease in supplies from Russia?

In China, the restrictions were connected to more competitive offers from Australia and Indonesia. After the unofficial ban was lifted, Australian thermal coal producers quickly re-entered the Chinese market, coinciding with an overall increase in coal import volumes to China. Since the reintroduction of import duties on coal, Australia and Indonesia have gained an advantage over Russian exporters, thanks to their free trade agreements with China.

From Russia's perspective, logistics was the primary reason for the decline in supplies to China. The capacity of Russian railways traveling eastward remains limited, while shipments to the northwest and south have become nearly unprofitable following the cancellation of discounts. In 2024, the share of exports routed through the northwest and southern ports decreased to 4%, down from 7% in 2023.

Exports through border crossings to China continued to increase in 2024; however, further growth is constrained for several reasons. Since August, growth has flatlined, and supply levels have stabilized between 1.45 and 1.56 million tonnes. This rise in export volumes at border crossings has resulted in decreased transportation speed and increased idle time of wagons at the border, ultimately lowering the already limited efficiency of rail transportation in the network.

Will Russian exporters be able to restore their supply volume to the Chinese market? This will largely depend on the domestic logistics situation.

What additional factors can help Russian manufacturers establish long-term relationships with Chinese buyers?

A good example of stable relations in the thermal coal market are Japan and Australia, which have been working under annual contracts for many years.

The Chinese import market differs significantly from the high-calorific coal market in the JKT region. Unlike Japan and Korea, Chinese power plants depend heavily on long-term contracts with domestic coal producers. Additionally, the quality requirements for coal in China are less stringent. In the same time the basic calorific value range for imported coal from Australia and Russia is typically between 5,000 and 5,500 Kcal/kg.

Currently, Russia faces limitations in its export markets, with China being the primary destination for Russian coal exports, particularly those with a calorific value of 5000-5500 Kcal/kg. This is also due to the modernization of Chinese power plants and a growing demand for higher-quality coal.

The main issue with the cooperation between Russia and China, according to our analysis and the views of some market participants, is the price level. The mining company Glencore is selling part of its production this year for $146/t under contracts for Australian coal at 6000 Kcal/kg. Meanwhile, the FOB Newcastle quotation has varied between $118-150/t throughout the year, with an average price for 2024 likely to remain around $134-136/t. It is clear that the price in potential contracts with Chinese energy companies will be significantly lower.

Overall, global prices have been steadily declining, and this trend is expected to continue into 2025. Coal demand in the JKT region will gradually decrease, but weather conditions in Australia may lead to some price volatility. Additionally, a slowdown in mining investment could provide support for prices in the long term.

But in the Chinese market, the level and volatility of prices are decreasing at an accelerated pace. Following a supply shortage in 2021 and a price surge in 2022, China is now approaching issues of energy security with caution. Imports are increasing alongside stable domestic production. This strategy enables Chinese consumers to advocate for lower prices, especially given the country's significant coal reserves. In the second half of this year, even the typical seasonal surges in demand and prices have started to diminish. By December 20, domestic prices reached their lowest level since June 2023, which has also had a negative impact on the import market.

What can encourage Chinese buyers to establish long-term contracts with Russian suppliers under these conditions?

To achieve a price level in these contracts that makes cooperation mutually beneficial, both parties need to adopt a long-term perspective on the situation.

If Russian coal exports continue to decline and investment in Australian coal mining decreases, China may eventually encounter supply shortages of high-quality coal for its new fleet of coal-fired power plants. Meanwhile, Russia is less affected by ESG restrictions compared to Australia and has promising existing and new deposits of quality thermal coal. Additionally, the cost of producing this coal in Russia remains lower than in China, largely due to the prevalent use of open-pit mining methods.

Russian exporters with long-term contracts can enhance their logistics negotiations with Russian Railways, as well as effectively plan production volumes and investments in new projects for several years.

Long-term contracts in the thermal coal market between Russia and China present a potentially interesting opportunity for the coal industry during these challenging times. However, for this to materialize, Russia needs to continue investing in addressing logistical challenges, and Russian coal companies must be ready to meet at the negotiation table with Chinese buyers.

(By Lena Soldatova, analyst at Metals and Minining Intelligence)