Analysis: Japan ban on Russian coal imports to be a boon for Australia?

Joining the European Union (EU) and G7 allies, Japan has decided to ban Russian coal and oil imports (announcing its decision on 9 May, 2022) even as it entirely depends upon energy supplies from other countries.

However, the same is likely to have a major bearing on its coal import volumes from other origins as it aggressively looks for alternatives to replace Russian supplies. While Russian coking coal share in Japan's total imports is low, the country has a noticeable share in thermal coal imports.

Thus, post-ban, power utilities in Japan are accelerating their efforts to replace Russian coal, especially with Australian counterparts since these are a high-CV variety whereas Indonesia supplies mid and low CV in abundance.

Japan is the world's third-largest coal importer, and Russia was the country's third-largest thermal coal supplier last year, accounting for 12% of its imports.

Japan's key thermal coal suppliers in 2021

*Qty in mnt

Australia already accounts for the lion's share of thermal coal imports into Japan as these rose by 13% in 2021, followed by shipments from Indonesia, and Russia, customs data showed.

In the absence of Russian coal, 15 mnt of Japan's thermal coal requirements will have to be met from alternate origins.

Australia is also a favoured choice for Japan as both countries are already connected on the third-largest dry-bulk trade route in the world, which shipped some 65 mnt of iron ore from Australian mines to Japanese steelmakers in 2019.

Australia's largest coal mine developments are also co-owned by major Japanese corporations, as despite carbon neutrality targets, these firms have been looking at avenues to use more coal.

Russia has 6% share in Japan's coking coal imports

*Qty in mnt

In case of coking coal, Japan imported 2.5-3 mnt per annum from Russia over the last three years, which comprised around 6% of its total requirements. But, in the absence of Russian coal, this volume will not be a challenge as it can be procured from Australia or the US.

Ultimate impact on prices

Amid increased demand for thermal coal, Australian prices have already gone up. In a deal closed on 18 May, Australian thermal coal prices touched $422/t while key miner Glencore and Japan's Tohoku Electric are already in talks to sign a long-term contract for supplying high CV coal and that too at elevated levels. This contract usually sets the tone for prices in the Japanese market.

The price of Newcastle 5,500 kcal/kg NAR coal has risen over 90% since the beginning of this year to $210/t FOB on 18 May.

In case of coking coal, prices for the premium Australian-origin are already up 50% in the last six months and are currently at $550/t FOB. Although Japan is not a major buyer, its decision to ban Russian coal is likely to support higher coking coal prices too.