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2019 December 17

Winning hand in coal exports

While European countries announce their plans to reject coal energy generation, the demand for this fuel is growing in Asia. However, too slow modernization of the eastern railways and absence of a long-term concept of the railway rates policy create risks for coal exports. It is internal logistics that matters rather than closeness to sale markets.

Find a way to India

According to publicly available sources, global coal consumption grew by 1.4% in 2018, the highest growth since 2013. It was driven by the APR countries (71 million tonnes), primarily India (36 million tonnes). APR countries currently account for three fourths of the global coal consumption, up from two thirds a decade ago.

Meanwhile, the demand for coal in the countries of OECD (Organization for Economic Co-operation and Development) has dropped to its lowest level from 1975. Coal share in the energy balance of those countries has plunged to 27.2%, the lowest level over the recent 15 years.

In general, global coal imports in 2018 grew by 6.5%. The key exporting countries are Australia (29% of the total volume), Indonesia (26%) and Russia (16%). Over a half of the coal volume (55%) was imported by India with other APR countries accounting for 24%.

India also demonstrated the highest growth of coal imports (+25.5%). The key suppliers of coal there are Australia, Indonesia and South Arica. China also demonstrated coal imports growth (+4.6%) with Australia and Indonesia being its key coal suppliers.

EU countries in their turn announce their plans to reject coal energy generation although some of them are reluctant. However, the pressure of the “green” on the EU Governments has been recently demonstrated to a great extend due to Greta Thunberg’s speech at the U.N.'s Climate Action Summit which triggered a new wave of public speeches in protection of “green economy”.

France is going to close its coal-fired power plants in 2021. The Netherlands are set to stop coal energy generation by 2030 having started the process from 2021. Sweden has announced its plans to stop using coal from 2022, Austria – from 2025, Finland – from 2029.

Under a public pressure, Germany, one of the last strongholds of coal energy industry, also had to adopt a large-scale environmental programme that particularly foresees rejection of coal.

Spain, Poland and Eastern Europe do not plan rejection of coal so far but that will not stop the fall of demand for solid fuel in the EU.

BP forecasts that coal demand will decrease by 2040 about 4% versus the current level while the demand for gas and renewable energy will grow. Although the share of coal in global energy balance will decrease it will not be substantial in raw numbers.

Thus, we see two main trends in the global coal market: countries of OECD reduce coal consumption while the market growth is retained due to the APR countries. The key role is being played by India while China does not demonstrate such a fast growth of imports. That should be attributed to economic slowdown in China that can be explained by a so called middle income trap and the trade war with the USA. India so far has a status of economic catch-up with a potential comparable to that of China.

Hindering factors

Nevertheless, no considerable decrease of coal demand is expected even in the long run and renouncement of transshipment facilities development will only mean that we lose our market share to competitors that are strong without it. Therefore, we can expect the increase in the number of coal terminals in all sea basins of Russia, at least in the mid-term.

Yet, coal exports to the APR countries are obviously most profitable from the ports of the Far East Basin, to India – from the same Basin and from the Southern one.

No wonder that most plans on development of port infrastructure for coal transshipment are associated with the Far East. Vostochny Port, the largest and the most advanced coal terminal, is located there. Its operator was the first in the Far East Basin to complete the project on expansion of its facilities as part of its Phase 3. Now, the stevedore can handle 55 million tonnes per year. Notably, the first loaded at the Phase 3 facilities was bound for India and Prime Minister of India Narendra Modi was acquainted with the Russian port project during the Eastern Economic Forum 2019.

Another interesting project is off-shore transshipment of coal arranged by East Mining Company (EMC) in Shakhtersk port on the Sakhalin.

However, further development of facilities in the Far East is hindered by insufficient capacity of railway infrastructure, modernization of which is lagging behind the development of stevedoring facilities. Actually, development of many coal terminals there remains ink on paper for years or means roughly converted facilities initially intended for handling of other cargoes, hence their non-compliance with today’s environmental and technological standards.

So, we see the future of coal transshipment in the Far East to belong to high-tech dedicated terminals having already secured a foothold in this market and proven logistic chains.

The factors limiting the development of coal exports via the ports of the Far East are insufficient capacity of remote railway approaches and absence of long-term forecasts on railway rate policy.

An illustration of railway infrastructure significance for coal projects is a concession agreement with TEIC Kyzyl-Kuragino on construction of Elegest-Kyzyl-Kuragino railway and a coal terminal in the Far East.

A positive example of cooperation between the business and Russian Railways is the above-mentioned Phase 3 of Vostochny Port JSC. As Irina Olkhovskaya, Director for Port and Railway Projects, UMMC OJSC, told in her interview with IAA PortNews, “When implementing the project on construction of Phase 3 of the coal terminal we obtained specifications from Russian Railways JSC. Together with Russian Railways we developed and approved the project on construction of public railway infrastructure facilities, the last, so called ‘green mile’... Railway tracks the construction of which was financed by Vostochny Port JSC is currently being used by Russian Railways to service the cargo flows of the entire Nakhodka-Vostochny hub.

When interviewed by IAA PortNews, Aleksandr Goloviznin, Director Analytics and Logistics, Morstroytechnology, commented: “international energy forecasts through 2040 show that the share of coal in the global energy balance is consistently decreasing. However, taking into consideration the general growth of global energy consumption in in absolute terms it is either stable or declines not that substantially while the growth of renewable sources lets only cover the growth of consumption. Actually, the forecasts say nothing about the coal prices. Apparently, such a lag will allow for a pay-back of investments into the terminal, especially if it is a captive terminal. The geography is clearly shifting. Europe has virtually stopped buying coal. In our reality, when selecting a port or a place for port construction coal suppliers are focused not on closeness to sale markets but on its connection with railways.

When speaking at the Transport Service Market conference in Moscow, Denis Ilatovsky, Deputy to General Director of SUEK, said that Russian Railways fails to spend funds allocated for construction of eastern railways. Only RUB 49 billion was spent of RUB 90 billion planned for 2019. Last week, RF Government approved shifting of 2020, 2021 and 2022 investments for three years ahead. “That will have a negative impact on the market of rolling stock and other markets”, said the speaker.

Concerning the rate risks, SUEK representative told about the “necessity to ensure predictability of rates calculation for a period of 15 years as this time is needed to for construction and pay-back of industrial facilities”.

According to Denis Ilatovsky, “rate changes have been quite substantial over the recent years but already adapted by the industry and the volumes have been distributed someway or other”. Actually, rate discounts for westward and southward transportation offered by Russian Railways in 2019 had no significant effect on distribution of cargo flows since “there is virtually no reason going to the North-West and we are late with construction for going eastwards”.

All those things considered, we can make a conclusion that rejection of coal-fired power industry in some countries will hardly result in considerable reduction of coal exports from Russia. However, the construction of coal transshipment facilities will primarily take into account availability of approaches with sufficient capacity, predictability of railways’ rate policy in the long run, depth required for accommodation of large-tonnage bulkers as well as high level of technologies and environmental safety.

Vitaly Chernov

More about coal transshipment in Southern and North-Western Basins is covered by new edition of PortNews magazine available at the Agency’s editorial office >>>>