How sanctions are strangling Russian coal
For two years, very high coal prices and strong demand from Asia boosted the Russian coal industry. As the situation on world markets normalizes, Western sanctions begin to bite.
Coal plays a special role in Western sanctions: It was targeted early and hard. To date, it is the only major Russian energy export that has been completely banned by the EU. Europe still imports some Russian oil, pipeline gas, LNG and uranium. But not coal.
Still, Russia's coal industry seemed to be doing just fine in the year following the imposition of sanctions. In the month of December 2022, Russian coal production even reached a new record high of 43.3 million tons. Global prices soared, and Russia enjoyed record export revenues from coal in 2022 and 2023. But since then, the situation has deteriorated.
In June 2024, Russian coal production fell to a new multi-year low of 32 million tons, if you count out the worst part of the Covid-19 crisis. Profits in the coal sector fell from 248 billion rubles in Jan-May 2023 to just 8 billion rubles from Jan-May 2024, while exports of thermal coal fell by 40% from a year earlier, Kommersant reports. In Jan-Apr 2024, more than half of Russia’s coal companies were making losses, according to Vedomosti. Russian experts say that the industry is entering its worst crisis in 30 years.
On the surface, there are several factors that are hurting Russian coal producers. World prices and demand from China have fallen this year. Since Russia exports about half of its coal production, producers are feeling the impact. In addition, the ruble has strengthened somewhat from last summer, meaning fewer rubles for every dollar of export revenue. Costs have risen and new export taxes have been introduced (part of the coal industry has been exempted since May, to help companies survive). High interest rates are hurting, too.
However, these factors are just the trigger of the crisis. The underlying reason for the struggles of Russian coal are Western sanctions. Losing the EU as a customer was painful for Russia because it is much harder to redirect coal to other markets than, say, crude oil. The reason is that the "economics of coal" work differently: Compared to other fossil fuels, coal is really cheap and heavy. Therefore, logistics are very important and a direct connection to the end consumer - usually by ship or rail - is crucial. For some Russian coal producers, logistics costs account for two-thirds of the final price of their coal.1
Transportation costs are key
Because of sanctions, logistics costs have risen. Russia’s new “friendly” customers like India are not its closest neighbours. Consider a coal shipment from a Western Russian port that used to go to Europe: Nowadays, it is likely to go to India instead. This is very similar to Russian oil exports. But there is one key difference: A large crude oil tanker (Aframax) carries around 50 million dollars worth of Russian oil2, while a similarly-sized bulk carrier (Capesize) only carries 15-20 million dollars worth of Russian coal3. If the cost of the voyage to India is assumed to be 5 million dollars for both of those ships, this leaves ample profit for oil exporters, but coal exporters will start making losses.
Of course, none of this matters when world prices are generally extremely high and demand is strong, as in 2022 and 2023. But as the situation on world markets normalizes, the effect of sanctions becomes apparent. Russian producers can no longer break even at world market prices they were comfortable with before sanctions. The cheaper the coal, the bigger the problem. That is why Russian producers of cheaper thermal coal (used in power plants) are suffering the most.
Sanctions also hurt Russian coal producers in other ways: They have similar problems with processing payments that Russian importers face, adding to costs. Some of them have relied on Western equipment that is no longer available, making it harder to maintain and replace machinery. Some Russian coal miners, such as SUEK and Mechel, are sanctioned by the US. These companies have to offer discounts to their customers, because the risk of dealing with sanctioned Russian businesses is higher.
Few coal miners go to fight in Ukraine
While salaries have also gone up, not many of Russia’s coal miners are going to fight in Ukraine, at least according to interviews with coal miners. Labor shortages caused by army recruitment do not seem to be the problem. Salaries in Russian coal mines can reach 150,000 rubles per month, depending on how hard and dangerous the work is. This is about half of what soldiers can earn in Ukraine. This is apparently not enough to lure miners away. It could also be that they are more integrated into a labor collective, less atomized and desperate than Russian men in other regions without industry.
If you are only interested in the main argument of this article, you can stop reading here. If you want to learn more about the Russian coal industry, I have added some background and lots of charts below.
Inconveniently located
Unfortunately for Russia, its most important coal reserves are located in the middle of the continent, almost at the maximum distance from world markets. The nearest ports are very, very far away, either in the European part of the country, or in the Far East along the pacific coast, or way north in the Arctic. Take a look at this great map from Indra Overland and Julia Loginova:
Source: https://www.sciencedirect.com/science/article/pii/S2214629623002104
Russia's main coal producing regions depend on Russian railways to transport coal to ports and other end users. Rail capacity is limited, tariffs are regulated, and there are intense lobbying battles over who gets how much capacity in which direction. Because of the limited capacity of the Russian railways, coal exports cannot easily be shifted from west to east.
Russia has been producing 430-440 million tons of coal annually in recent years. Russian coal sales in 2021 (before sanctions) were 382.3 million tons, of which 227 million tons went to export markets. The share of exports has increased over the past 15 years as domestic consumption has declined while total production has increased. This chart from the Russian Ministry of Energy shows the trend:
Source: https://minenergo.gov.ru/industries/coal/main-indicators/russian-coal-supplies
According to customs data, Russia made 17.6 billion dollars from coal exports in 20214 (for comparison: oil and oil products accounted for 180 billion dollars, pipeline gas 56 billion dollars). Most exports went to the Asia-Pacific region, while Europe imported 50 million tons, according to the Russian Energy Ministry. The ministry also distinguishes between good and bad customers - countries that sanction Russia, including in Asia ("unfriendly") bought 109 million tons of Russian coal in 2021, while countries that do not sanction Russia ("friendly") bought 114 million tons.
Source: https://minenergo.gov.ru/industries/coal/main-indicators/russian-coal-supplies
New clients in China, India and Turkey
After the sanctions were imposed, China absorbed a lot of excess supply. Russian coal exports to China almost doubled, from 52.3 million tons in 2021 to 97.3 million tons in 2023. Note that this increase is comparable to the entire European market. In June 2023, exports to China exceeded 10 million tons for the first time.
According to CREA, China, India and Turkey bought most of Russia's coal after December 2022. South Korea and Taiwan were also important customers (top left graph).
Source: https://energyandcleanair.org/july-2024-monthly-analysis-of-russian-fossil-fuel-exports-and-sanctions/
The volume of exports to China remains much higher than before 2022, although there has been some decline in recent months. Note that coking coal (used in steelmaking) is doing the best, while thermal coal (used in power plants) has almost halved from its peak.
Source of data: http://stats.customs.gov.cn/indexEn
Russia made loads of money from exports to China: In 2023, China imported Russian coal for 14 billion dollars - almost as much as total Russian exports in 2021. The reason is that prices were high: In most months, Chinese imports of Russian thermal coal cost 150-200 dollars per ton, while coking coal sold for 200-250 dollars/ton. However, this year, the world market has normalized. Thermal coal now goes for less than 100 dollars/ton, while coking coal fell under 150 dollars/ton.
Source of data: http://stats.customs.gov.cn/indexEn
The decline in both the volume and the price of coal exports to China predictably also led to a decline in total revenues, which at some point reached 1.5 billion dollars, but is now closer to 800 million dollars per month:
Source of data: http://stats.customs.gov.cn/indexEn
Coal production in Russia has not collapsed yet, so the crisis so far is more about revenue and export volumes than about production. But a certain production decline is already visible in recent months. The figure for June 2024 is very low (not that production fluctuates and seasonal and other factors can play a role: holidays, weekends etc…). Here is a chart of Russian coal production from January 2017 to June 2024:
Source of chart: Russian official statistics5
The Russian coal crisis is particularly severe for producers of thermal coal, which is the cheapest type of coal. The break-even price for these producers is particularly sensitive to rising transportation costs. Unless coal prices rise significantly in the next few years, many Russian thermal coal producers, especially those located far from ports, will continue to make losses.
The Russian government is likely to step in with subsidies, as coal mines often play an important socio-economic role and cannot simply be shut down. The fact that Russian thermal coal and anthracite producers are exempt from export duties makes it clear that the government does not want these companies to go bankrupt. It also means that the financial burden of the coal sanctions will ultimately fall on the Russian budget, which is a pretty good outcome from the perspective of the sanctioning countries.
This is what Sergey Sokol, the head of the Supreme Council from Russia’s coal-rich Khakassia, told Kommersant in April 2024.
Aframax tankers are common in Russia’s shadow fleet. This calculation assumes ca. 700,000 barrels for around 70 dollars/barrel.
The assumption is 180,000 tons of coal for around 100 dollars/ton.
Trade statistics from https://customs.gov.ru/. Use a VPN set to Russia.
Good article, thanks Janis.
Thanks for the article! That's really the way it is