COAL EXPORTERS CHASING HIGHER VOLUMES

TRADE & COMMODITIES Coal exporters chasing higher volumes

Exporters gained advantages from a global revival in coal import demand last year amid economies and energy markets recovering from the worst effects of the pandemic. In 2022 many coal exporters may continue to see increased volumes, despite expectations for the world economy’s growth being revised downwards. An exception to the generally positive coal export picture is Russia, where signs suggest a large decline could occur.

Two prominent influences in particular seem likely to affect the evolution of coal trade during the remainder of this year and into 2023. A more marked deceleration of global economic recovery than previously expected is now widely foreseen, reflecting inflationary pressures and, in China, pandemic lockdowns causing economy activity to weaken. The second aspect is the war between Russia and Ukraine, resulting in many countries ceasing to buy coal from Russia, the world’s third-largest exporter.

Earlier this year it seemed realistic to envisage world seaborne coal trade growing by up to 2% in 2022 as a whole, after a 5% rebound in 2021 from the previous year’s huge reduction. But prospects for further growth have receded. Although a number of importing countries may raise their purchases, others may see declines. Contrasting views for the two biggest importers suggest higher levels in India and lower volumes in China.

Coal supplies on the international market seem set to be constrained this year. However, a possible large-scale downturn in Russia’s exports could be accompanied by offsetting increases by other suppliers, enabling overall trade to remain broadly flat. Currently, supplies look sufficient to satisfy the volume of import demand predicted.

ENERGY DEMAND FOUNDATIONS Events in the past couple of years have demonstrated dramatically how changes in the pace and pattern of global economic activity affect energy consumption and the

Richard Scott, Bulk Shipping Analysis

demand for, and imports of, coal. After a slump in the world economy related to governments’ measures to control the coronavirus pandemic, a recovery unfolded in 2021. The upturn is expected to continue this year, albeit at a much slower pace.

One reason explaining reduced expectations for 2022 economic growth is China’s renewed weakness. Resumed lockdown measures and restrictions on movements in large urban areas to control and eliminate covid variations has severely curtailed manufacturing activity for extended periods. Elsewhere, among other countries, consumer spending reflects the adverse impact of accelerating inflation and much higher energy costs, with a large negative impact on economic growth rates.

A report about global prospects published in mid-May by the United Nations argued that the Ukraine conflict has “upended the fragile economic recovery” from the pandemic. It suggested that a further one percentage point could be deducted from the world gross domestic product growth rate in 2022, lowering its pace to just over 3%, half of last year’s 6% rate of progress. Moreover the UN emphasized that the crisis caused by the Ukraine war is “devastating global energy markets” as well as having other unfavourable impacts.

Similarly, a few weeks earlier, the International Monetary Fund commented on a deteriorating outlook, forecasting a GDP growth deceleration this year. After a strong revival in 2021 the war in Ukraine has “severely set back the global recovery” and now “inflation is expected to remain elevated for longer than in the previous forecast”.

A number of individual countries are especially significant from an energy consumption and, in particular, a coal consumption and imports viewpoint. According to IMF economists, China’s GDP growth could decelerate from 8.1% last year to 4.4% in 2022. By contrast India’s economy, after seeing a 8.9% upturn last year, could almost maintain growth at 8.2% in the current year. These changes have contrasting implications for energy consumption.

Among other major coal importing countries differing performances are envisaged. Japan’s GDP saw a 1.6% increase last year, which could be followed by 2.4% growth in 2022. South Korea’s economy experienced a 4% recovery last year and is expected to grow by 2.5% this year. In the Eurozone group growth of 5.3% was achieved in 2021 after a severe downturn but in the current period below 3% is predicted.

Resulting from downwards revisions in forecast economic growth rates to show sharper decelerations in many countries, energy consumption is likely to be affected. While implications for competing energy supplies including coal are not always obvious, signs have emerged pointing to support for coal, reflecting steep rises in prices for alternative energy supplies such as gas, and actual or potential shortages of some energy sources.

Other influences also change the relationship with imported coal volumes in some countries. Varying trends in domestic production of coal can be influential, especially in China and India.

Another aspect is the longer term focus on alternative energy sources. Environmental regulations designed to limit or reduce coal burning are a notable feature, usually with negative effects.

OVERVIEW OF EXPORTERS international coal trade looks likely to be restrained and not grow much in 2022 but the outlook for many coal exporters seems positive. Changing trade patterns imply benefits for a number of suppliers, augmented by buyers switching away from Russian volumes towards other sources. The impact is difficult to evaluate because geopolitical influences will affect the outcome. Coal trade is substantially shaped by political decisions in importing countries, often reflecting environmental pressures designed to reduce air pollution and cut carbon emissions. Although some of these decisions are foreseeable in principle, the precise timing and extent is not always predicted correctly, adding to speculation surrounding trade volumes and patterns. At present the war involving one of the biggest coal exporters and the sanctions imposed in reaction are compounding uncertainty about political influences on the coal market. A cautious outlook for this

A report from the UN argues that the Ukraine conflict has “upended the fragile economic recovery” from the pandemic.

2017 2018 2019 2020

2021 2021 % change**

Australia 374 386 396 372 366 -1.6 Canada (coking) 29 29 29 33 29 -9.4 Colombia# 82 80 75 55 32 -41.8 Indonesia# 389 429 466 399 440 +10.3 Russia 181 198 207 207 204 -1.4 South Africa# 76 79 77 74 80 +8.1 USA (exc to Canada) 88 106 84 59 72 +22.0

** compared with previous year #steam coal only source: Australian Government Dept of Industry, Science, Energy & Resources, 4 April 2022 and BSA calculations

year was published recently by the Australian Government Department of Industry, Science, Energy and Resources (AGDISER). Calculations suggested that world coal trade — mostly seaborne but including land movements — could decline by 37mt (million tonnes) or 3% in 2022. From an estimated 1,382mt last year, the total was expected to fall to 1,345mt this year.

Differing percentage changes in the two main parts were envisaged. Steam or thermal coal trade, the largest part comprising three-quarters of the total, was forecast to decline by 35mt (over 3%) to 1.024mt this year. In the metallurgical or coking coal sub-sector comprising the remainder the current year’s volume was estimated at 321mt, a reduction of under 1%.

But opinions vary given the uncertainties evident. During the period since these calculations were published, other coal trade forecasters have suggested an outcome between a marginal 1% increase or decrease in the world seaborne total, compared with the previous twelve months. Among countries where there is perhaps the biggest uncertainty about import demand prospects are China and India.

Looking at supplying countries, the world coal market outlook suggests potential for many to raise exports during 2022. Commercial competition will influence varying success in achieving such results. But this year the impact of government trade policy in the importing countries will have an even larger role than previously seen, amid steps taken by a number of governments to reduce or eliminate purchases from Russia. Another aspect is the ongoing dispute between Australia and China which has greatly affected coal movements on this route.

Within the exporting countries trends in coal production, and availability and quality of export supplies are determined by domestic influences. These include the scale, efficiency and profitability of mining activity and output, the type of coal produced, and the proportion absorbed by domestic demand. Production costs and internal transport capacity and costs have an impact on competitiveness and pricing in the international market.

INDIVIDUAL EXPORTERS’ PROSPECTS The significance of the main suppliers to the world coal market is shown in the table above, listing exports in 2021 and preceding years as calculated by AGDISER. Volumes shown represent about 90% of all world trade in coal, providing a guide to unfolding patterns. Large and often contrasting annual changes among individual countries are a feature.

Steam coal exports by number one supplier Indonesia increased by 41mt (10%) to 440mt in 2021 according to these calculations. This total included large quantities of low-grade lignite mainly carried to China for power station use. During 2022 a small decrease of 8mt or 2% to 432mt is seen as a possible outcome, reflecting a temporary governmentimposed export halt in January to ensure sufficient domestic availability. In the longer term, Indonesian government policy aims to conserve coal production and prioritize supplies for domestic users.

Exports from Australia are fairly equally divided between steam coal and metallurgical coal (this category includes some steam grades used in the steel industry). In 2021 the 366mt total was 6mt (2%) lower, comprised of 199mt steam coal (54% of overall volume) and 167mt metcoal. For 2022 a 17mt or 5% overall increase to 383mt was forecast, but other indications suggest a smaller rise may occur.

Russia is the third-largest supplier to the world market, mainly selling steam coal grades. Exports totalled 204mt in 2021 (including land movements), a small 3mt decrease from the previous year. Over four-fifths consisted of steam coal totalling 172mt. The outlook for the current year is highly uncertain because of sanctions and informal curbs on buying by a range of importers. Some estimates suggest these could lead to a large 10–15% reduction, depending on the volume of additional sales to countries not applying sanctions.

Exports of coal from the USA experienced a rebound last year when the total (excluding shipments to Canada) increased by 13mt or 22%, to 72mt. Within this quantity steam coal comprised 32mt, accompanied by metcoal shipments of 40mt. Usually the USA is regarded as a price-sensitive swing supplier in world markets, because most of its production is high-cost and therefore more vulnerable to competition. In 2022 a similar 70mt volume is predicted by AGDISER, but other forecasters suggest growth may be achievable.

South Africa is shown by the figures included in the table as increasing exports last year, but more recent data shows revised calculations revealing a decline. Steam coal exports (the largest part) apparently diminished by over a tenth to 65mt. Some signs point to a slight strengthening during the current year amid changing patterns among exporters.

Most exports from Colombia consist of steam coal grades. Although the table shows a large decline, revised figures from other sources suggest that an increase was achieved, raising steam coal sales by about 7% to reach 63mt. In 2022 another rise may be seen, especially if Colombia is successful in selling more volumes into Europe, which in some previous years has been a weak market but is now regaining momentum.

Another significant supplier is Canada, mainly exporting metallurgical coal. These exports (excluding shipments within North America to USA) are shown in the table as decreasing last year, although some other

sources indicate that an increase occurred. In 2022 growth is expected, reflecting opportunities for some exporters as a result of reductions elsewhere. In Mozambique, a relatively minor supplier, exports of metcoal apparently totalled only 4mt last year, and some steam coal is also supplied, but prospects point to future growth.

A DECELERATING REBOUND Restrained optimism about further growth in global seaborne coal trade during 2022 (and perhaps next year as well) or, alternatively, restrained pessimism about a marginal reduction, is embodied in forecasts of an annual change of between plus and minus 1% compared with last year’s level.

Uncertainties surrounding such prognostications, based on patterns visible for some time, have been accentuated by the fallout from the war in Ukraine and its effects on global energy markets.

Support for coal import demand is being derived from the world economy’s recovery from the Covid pandemic, albeit with negative effects related to virus infection setbacks in some countries including recently in China. Energy demand around the world has revived amid returning strength among consuming industries, and coal has benefited. Asian countries, where most coal demand is located, have been at the forefront, while the relatively minor component of European coal consumption and imports also has been boosted.

Because commercial influences on trade are now accompanied by powerful political influences reflecting environmental pressures, future coal trade has become less predictable. Even when the longer term trend direction appears to be fairly clear, year-to-year changes in seaborne trade volumes tend to be heavily based on speculation and guesses, both for the global total and for individual countries participating. Broad assumptions about changes often require modification.

In some countries, especially in Europe, recent events have promoted a renewed focus on the value of coal as a component of energy supplies. Perceived shortages of other energy supplies are a prominent concern. The global market for natural gas is tight and prices are high, while the sometimes fluctuating reliability of renewable energy has attracted more attention in current market circumstances. Consequently coal’s contribution has been re-assessed and is being viewed more positively, at least for the near-term future, despite the ongoing priority of reducing carbon emissions.

Over a longer period, ongoing influences are widely expected to diminish global coal trade volumes. Environmental pressures have profoundly unfavourable implications for coal usage and import demand. In many countries decarbonization strategies are being applied with intensified vigour. Competition from alternative energy sources is growing, especially renewable sources, some with falling costs. Government measures in numerous countries are designed to phase-out coal usage in the years ahead.

Among coal importers, restraints are particularly visible in Europe. Restrictions are also evident in some Asian countries, where changes weakening coal use are already clear or are foreseeable, reflecting government energy policy priorities. The pattern is not uniformly negative for coal trade however, because in several smaller Asian importing countries growth is still evident. Moreover in the major importers China, India and Japan, downwards trends have not yet become entrenched.

Changing circumstances suggest that many coal exporters could benefit from higher sales in 2022. But eventually, looking further ahead, stronger headwinds could return as global import demand is dampened by downwards pressures. DCi