How might India benefit from changing Russian coal trade dynamics?

*Post sanctions, 60 mnt of surplus Russian thermal coal to remain in market

*India, China stand to gain by tweaking terms of trade settlements

*India may get to avail of cheaper Russian coking coal

The Russia-Ukraine conflict that started on 24 Feb'22 is likely to have a long-term impact on global trade dynamics. The third-largest coal exporter (both thermal and coking coal) in the world, Russia exported about 216 mnt of coal in 2021. However, with financial and economic sanctions imposed on the country by the western and a few Asian countries, coupled with the ban from the global banking network SWIFT, the big question is where will Russia divert its huge coal supplies in the global market?

Russian exports to China, India

Russia exported about 152 mn t of thermal coal in 2021 with about 18% (27 mnt) being exported to China followed by Europe at 17%, 20% to Asian countries such as Japan and South Korea and only 2% to India.

The EU, Japan and South Korea have decided to halt business with Moscow. However, in the case of China and India, although trade with Russia has taken a beating since the first week of March, no sanctions have been imposed by the two countries.

There is hearsay in the market that both the countries are looking at the possibility of carrying on with Yuan-Rouble and INR-Rouble trade settlements with Russia following the imposition of stringent sanctions.

This means that there will be surplus of 60 mnt per year of thermal coal in the market due to the sanctions imposed on Russia. And, in case new payment mechanisms are put in place, China and India would have the opportunity to absorb the surplus coal which is being offered at cheaper rates compared to high global prices.

India currently imports about 140 mnt of thermal coal from Indonesia, Australia and South Africa - 95% of its total imports. The average import price for high-CV (5500 kcal/kg NAR) thermal coal of different origins stood at $120/t in 2021, up by 93% y-o-y.

On the other hand, China imported about 83 mnt of thermal coal in 2021 with 38% of it coming from Russia and 36% from Indonesia.

Amid the surge in global prices, cheaper imports from Russia will provide some respite to the domestic thermal coal-user industry, especially the power sector, in both China and India.

Russian coking coal: Advantage India?

Moreover, Russia's coking coal and pulverised coal injection (PCI) coal exports stood at 32 mnt in 2021. China accounted for 29% of exports, while the share of countries that have slapped sanctions on Russia was around 51%. India's share was at 2%. As per estimates, there would be a surplus of about 16-17 mnt of Russian coking coal and PCI.

China's and India's coking coal imports stood at 44 mnt and 56 mnt, respectively, in 2021. Russia's share in their imports stood at 23% and 2% respectively. For India, the major coking coal sourcing destination is Australia followed by the USA contributing about 95% of total imports. The average imported coking coal price for India from Australia climbed 100% y-o-y to $230/t CNF India in 2021.

INR-Rouble trade

In terms of demand, India's coking coal requirement is around 90 mnt, while China's consumption is around 800 mnt. Given the fact that China meets a majority of its coking coal requirement from domestic sources, any additional supplies from Russia won't make a major difference for China.

However, in the case of India, given the poor domestic coking coal quality, imported material is usually preferred, which means that if the Rouble-INR trade settlement mechanism is implemented, India would have a greater advantage in terms of receiving cheaper coking coal from Russia.

Expectedly, this could open up a great opportunity for Indian integrated steel producers. Coking coal makes up around 40-45% of the cost of one tonne of crude steel production. In times of rampant volatility, such as recently when premium Australian coking coal hit over $670/t FOB, the share of imported coking coal costs in steel production rises to over 55%.

Indian end-users have tried to get around this problem by trying to increase consumption of PCI coals, etc. However, Russia's supply consists of mainly weaker and semi-soft coking coal grades, which is a concern for steel producers.