Chinese traders are scaling back imports of Russian coal as they struggle to secure financing from state banks worried about potential sanctions after Russia invaded Ukraine, in early signs of supply disruption from the world’s third-largest coal seller.
Coal prices from other exporters Indonesia, Australia and South Africa have jumped this week, with benchmark Newcastle coal hitting a record $274.50 a tonne on Monday, a 15% rise, in the wake of Russia’s launch of what it said was a “special military operation” in Ukraine on Thursday.
Key global coal prices
China is Russia’s largest coal buyer, taking in more than 50 million tonnes of coal worth $7.4 billion last year via rail and sea from Russia’s Far East. Russia accounted for roughly 15% of China’s total imports and was its second largest supplier behind Indonesia.
“Most banks have stopped issuing letters of credit after the SWIFT sanctions. As almost all contracts are dollar-denominated, we have no other way to make the payment,” said a China-based trader dealing in Russian coal. Other traders are in discussions with Russian exporters about paying with the Chinese currency for the first time.
“We’re waiting for their response, but trades have been put on hold for now,” said a second trader, who imports Russian coal regularly via rail into northeast China.
The United States and its allies on Saturday moved to block certain Russian banks’ access to the SWIFT international payment system that facilitates the bulk of international financial flows. While some buyers could eventually resort to using China’s onshore clearing and settlement system, known as CIPS, overall purchases by China have been muted since last week after Beijing cut the domestic price cap that makes coal imports largely uneconomical. Ample domestic coal inventories and an upcoming seasonal dip in its use for heating mean Chinese buyers can afford to pause imports for now. But any prolonged supply gap from Russia is a concern for buyers as Beijing maintains a ban on imports of Australian coal and top supplier Indonesia this year imposed new export limits.
Rising freight costs are another worry, with shipping charges already substantially higher from Indonesia and South Africa than from relatively local ports in Far East Russia.
Chinese coal imports face steeper shipping costs if they want to replace Russian cargoes
“Global coal prices are unlikely to fall in the near term partly due to the high freight rates,” said a Singapore-based trader, adding that the Ukraine crisis added upwards pressure to already elevated freight rates due to supply chain bottlenecks and economic recovery.