Aletho News

ΑΛΗΘΩΣ

The Chinese Dimension of Russia’s Coal Business in a New Environment

By Petr Konovalov – New Eastern Outlook – 16.05.2022

Various projects to do away with coal and switch to other fuels that emit less combustion gases have long been discussed in developed countries. Some experts have even begun to predict the imminent demise of the entire global coal industry. One of the reasons for these forecasts has been statements by China, the world’s main coal consumer, that it also wants to reduce its use of coal as much as possible, along with Western countries.

However, despite all these claims, coal is still the cheapest and most transportable fuel, which no country with a developed industry can do without. The global coal trade continues to grow, generating good revenues for its main suppliers, including Russia.

In 2020, the Russian Federation produced about 401 million tons of coal, 199 million of which was exported to other countries.

In 2021, tensions between the PRC and Australia escalated, causing China to stop importing Australian coal and contributing to an increase in Chinese coal purchases from Russia.

By the end of 2021, Russian coal production was about 440 million tons per year, with 227 million tons exported. Thus, both Russian coal production and exports have shown significant growth. Of the above-mentioned coal exports, 129 million tons were sold to the Asia-Pacific region, which is particularly noteworthy because it is specifically this region that has major coal consumers such as China, South Korea and Japan, making the APR market particularly attractive for all coal exporters. China received 53 million tons of Russian coal, 20 million tons more than in 2020, earning Russia $7.4 billion.

In total, the Russian Federation accounted for more than 16% of the global coal market in 2021, 12% of the APR market and 15% of the Chinese market.

Since the Chinese coal situation came rather unexpectedly, the Russian Federation could not fully replace Australia on the Chinese market: most of Russia’s coal exports had already been allocated to other buyers and there was not enough time to multiply production. As a result, faced with an energy crisis, China started importing Australian coal again in late 2021, partly lifting the restrictions. However, the situation at the end of 2021 and beginning of 2022 still looked encouraging for the Russian coal sector. First, experience has shown that China cannot do without coal; Chinese decarbonization projects, which Beijing has been talking about for years, will not be implemented anytime soon – until then, the Celestial Empire will be importing coal. Second, having experienced power shortages without Australian coal, Beijing was able to see that its reliance on one supplier, Australia, was excessive. The tensions with Canberra in 2020-2021 are just one part of the larger political and economic confrontation between China and the West, and there could be many more conflicts ahead for the PRC and Australia. Therefore, to secure its energy sector, China needs to diversify its coal imports, including by further increasing supplies from Russia.

In February 2022, the media reported that Beijing and Moscow were negotiating an intergovernmental agreement under which coal supplies from Russia to China could be increased to 100 million tons per year.

However, at the end of February, a special operation by Russian troops in Ukraine began and the situation changed dramatically. The West has unleashed a torrent of sanctions on Russia, including Western countries starting to reduce imports of Russian hydrocarbons. In March 2022, for example, Russian coal shipments to the EU dropped by around 50%.

Although China is not an ally of the West, Russian coal exports to the Celestial Empire are also on the decline, as Chinese banks have reduced funding for related operations for fear of Western sanctions. The disconnection of a number of Russian banks from the SWIFT international payment system and the fact that most of the coal purchase contracts were in dollars also played a role: the Chinese side has had difficulty making payments.

Some pro-Western media have concluded that the Russian coal industry has suffered serious damage, that trade with China will not compensate for this damage, and that coal exports may not recover to their previous levels. However, such conclusions are rather premature.

Thus, despite the overall decline in the Russian coal exports to the PRC, exports of coking coal, a type of hard coal particularly valuable for the steel industry, increased in the first quarter of 2022. It can be assumed that the decline in Chinese purchases of other types of coal, which are used for winter heating, for example, may be due to the approaching summer period.

China now has a considerable supply of different types of coal, and in the run-up to the warm season, when there is no need for mass home heating, it can afford to reduce coal imports to explore new conditions. By autumn, however, it can be expected that Chinese-Russian coal cooperation will intensify.

As for sanctions-related difficulties, talks began as early as March between Russia and China on settlements in national currencies and on the use of CIPS, China’s equivalent of SWIFT.

It should further be noted that the Chinese side’s caution over the threat of Western sanctions is also a temporary phenomenon, as the PRC’s relations with the West are not good at all, and China may soon fall under its own sanctions regardless of its relations with Russia. Especially in view of certain features of Chinese foreign policy: on May 6, 2022, for example, some 15 Chinese planes entered the airspace of the partially recognized state of Taiwan, which the PRC considers part of its territory. The Taiwanese have scrambled their warplanes and put their air defense forces on alert. Fortunately, the incident ended peacefully. However, since Taiwan is under the protection of the US military, there is no doubt that the incident will further strain Chinese-US relations, and if it continues, the PRC will soon find itself in the same “sanctions boat” as Russia. In this case, Chinese coal imports from Australia are likely to suffer again.

It can therefore be assumed that China is seeking economic independence from the US and its allies, including from Australian coal supplies, and the Chinese leadership is already working out how to circumvent Western sanctions. One can fully expect that joint efforts in this area will soon allow Russia and China to move towards more intensive trade, including in coal and other energy sources.

May 16, 2022 - Posted by | Economics, Russophobia | , ,

No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.