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Russia eyes the East

World Coal,

According a new report from Mitchell Hugers of BMI Research, Russia’s coal production growth will be supported by coal sector investment and increased export competitiveness, the latter due to rouble weakness. The firm’s outlook on the Russian economy remains bearish and a 5.2% contraction of real GDP is forecast for 2015.

However, despite the bearish outlook, BMI holds that rouble weakness will stimulate mineral exports and increase domestic miners’ competitiveness over the coming quarters.

Russian coal export growth is expected to be bolstered by the following:

  • Increased coal export competitiveness due to the weak rouble. Russia’s coal sector will experience significant coal export growth as weak domestic consumption and the rouble’s decline will increase domestic coal miners’ competitiveness. BMI believes Russia’s coal trade export flows will increasingly shift towards Asia, as Russia will continue to be challenged by cheaper shipments from countries including Colombia, Canada and the US over the coming years.
  • Domestic coal sector investment will support coal production growth. The Russian government has explicitly stated its intention to develop the country’s coal reserves, alongside major investment into logistics and engineering capacities. According to the Ministry of Energy, Russia will spend an estimated US$123 billion on the coal sector between 2012 and 2030. For instance, Russia will start construction in April 2015 on the US$530 million Severniy port, in the Primorye region, which will handle 20 million tpy of coal.

Rouble weakness to spur exports

Rouble weakness will boost the country’s export competiveness over the coming quarters. This trend is already visible through Russian coal exports increasing 8.8% over 2014 to reach 140.2 million t. The rouble’s 50.0% collapse over 2014 has shielded the country’s domestic producers from the significant drop in international coal prices, as the country’s miners export coal in US$, and receive nearly twice the amount of roubles as before. BMI forecasts global coal prices to average US$66/t over 2015 – 2018, significantly lower than US$93/t over 2011 – 2014.

Over the long term, Business Monitor believes that Russia’s coal export share to Europe will decline due to the majority of Russian miners operating on the high end of the cost curve. Russian miners will find it difficult to compete with ‘low cost’ coal producing countries, including the USA and Colombia. According to Bloomberg, Russia is on the high end of the thermal coal cost curve, with extraction costs averaging US$80 – 100/t, while the US and Colombia have average costs of US$40 – 55/t.

Shift to the East

The gradual re-orientation of Russia’s coal exports from Europe to Asia will be driven by growing demand for both thermal and coking coal, according to BMI. Demand for thermal coal will continue to increase as energy poverty remains a key concern in countries including India and China. As outlined by the country’s Energy Ministry, the Russian strategy for developing the coal industry through 2030 entails transferring the centre of production to the eastern regions in order to facilitate access to Asian markets. For instance, the Far East’s share of domestic coal output will rise from 9.7% in 2010 to 15.2% by 2030, while Eastern Siberia will grow from 25.8% to 31.9% over the same period.

The view on re-orientation is bolstered by the construction of Russia’s US$530 million Serverniy port. The port is a collaboration between Russian government, which will invest US$ 340 million, private actors and the Chinese Bank of Development, which will invest US$190 million. Additionally, Russia will build another significant coal port in Primorye, which will cost US$265 million and will be capable of handling an additional 20 million tpy of coal upon completion. The construction of the coal ports falls in lone with the government’s plan to invest US$123 billion in the country’s coal sector over 2012 – 2030.

The Russian government eastwards shift is visible through the strategic investment of coal ports in the country’s east. For instance, coal is the primary commodity exports from the port of Vostochny and it is therefore the main driver of cargo throughout growth at the port. The port of Vostochny is located in the south of the Primorsky Region, and is the largest port in Russia’s Far East, besides the planned coal ports in Primorye, which will export a combined 40 million t when completed in 8 – 10 years. The port primarily exports coal to Asia but also benefits from strong intermodal connections such as to the Trans-Siberian Railway, which together with the port, forms part of the Asia to Europe land bridge, as well as road links to Russia’s highway network.

BMI believes that the port of Vostochny will continue to benefit from the changing demand picture for Russia’s coal exports beyond 2015. They predict that cargo tonnage at the port will increase by an annual average of 2.2% between 2015 and 2019, from 22.7 million t to 24.8 million y. The port of Vostochny is also strategically located, proximate to Asia, and will therefore continue to have an important role to play in Russia’s coal export supply chain.

The slew of positive developments currently taking place in Russia’s freight transport sector is a further cause for optimism. In a bid to enhance coal flows into Asia, Russia opened a new 54 km cross border freight railway line linking the Russian town of Khasan and the North Korean port city of Rajin in 2013.

Bilateral outlook: China

China’s cooling economic growth resulted in total Chinese coal imports falling 14.3% over 2014, with coal imports from Russia declining by 6.1%. BMI expects continuing import weakness for China over 2015, but expects imports to grow stronger in the following years. Business Monitor believes that China will remain reliant on coal imports over the coming years and Asia is expected to command a growing share of Russian coal exports in the coming years. Asia’s share of Russia’s coal exports has continued to expand over the past decade, rising by 18% between 2003 and 2013. In particular, coal shipments to China surged from just 0.1 million t to 25.1 million t over the same period.

BMI believes warming energy ties between Russia and China will accentuate the shift in global coal trade flows towards the East. In yet another sign of tightening economic links with China, Russian state technology conglomerate Rostech agreed to jointly develop the Ogodzhinskoye coal deposit in the Amur region with Chiba’s Shenhua Group on 4 September 2014. The project, with an estimated output of 30 million tpy is expected to come online in 2019.

In addition, transport links with China will deepen as a result of China’s plan to construct a 7000 km railway, costing US$242 billion, between the two countries. Rail will offer exporters an attractive supply chain route into the Chinese market, BMI concludes.

Edited by Emma McAleavey. Source: BMI.

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