EU Embargo on Russian Coal Goes into Effect

In April this year, the EU officially approved the fifth round of sanctions against Russia, including the ban on Russian coal, which sets a 120-day transition period, which means that from today (11), the EU embargo on Russian coal is officially effective.

For this ban, the European Commission has said that it will affect 15% of Russia's coal exports and about 8 billion euros of annual revenue.

Data show that the EU used to import 45% of the annual coal from Russia. Germany, Poland and the Netherlands are the largest buyers within the EU. About 70 percent of the EU's power coal used for electricity and heating is imported from Russia. Compared to oil and gas, the total amount and value of Russian coal imported into the EU is much lower, making sanctions on Russian coal easier for the EU.

But before the embargo went into effect, European buyers had previously been scrambling to stockpile coal, including coal sourced from Russia, as a cost-effective way to meet the continent's energy needs.

So what impact will the EU embargo on Russian coal have on the shipping industry?

Coal shipping routes have already changed

A report released last month by shipping broker Banchero Costa shows, in the chart below, that Russia remained the largest source of EU coal in the first half of this year, followed by the United States, Australia, Colombia, South Africa and others. Total EU coal imports from Russia were unchanged in the first half of the year due to the Russian-Ukrainian war, while imports from other regions saw a significant rise.

Alexandra Alatari, a senior shipping analyst at Braemar Shipbroking, a leading shipping brokerage firm, then said that most of the long-term contracts with Russian suppliers are now cancelled and EU coal imports from Russia fell by 30% year-on-year in July.

On the other hand, while coal prices have also risen sharply, energy concerns and the fact that coal remains the most economical fuel, overall EU coal imports rose by 36 percent in July, mainly because imports from Atlantic suppliers doubled year-on-year to 6 million tons, which in turn came mainly from U.S. routes, as well as ships on the South Africa-Europe route.

What's next?

Alatari said we will see a more dramatic shift in trade routes after the ban is fully in effect, and the EU will have to pay higher prices to attract coal cargoes that would otherwise go to Asia, given that global production is not going to rise very much.

For Braemar, the expectation is that the US, Colombia, South Africa, and Australia will be the main sources of coal to Europe starting this month. The EU may take the opportunity to increase coal imports from these regions, especially since freight rates for dry bulk vessels have fallen sharply in recent times.

Burak Cetinok, chief analyst of another shipping brokerage firm Arrow Shipbroking, also said that the EU's ban on Russian coal could have a positive impact on the dry bulk shipping market.

Burak Cetinok said, "We may see more coal going to India as well as China, on the other hand the European side will need to find another source of cargo from further away in the Pacific and Atlantic markets, which will bring benefits to Panamax bulk carriers and even Cape of Good Hope dry bulk vessels, increasing the corresponding distance (tonne nautical miles) demand. "

Analysts at shipbroker Ifchor also expect Panamax vessels to benefit from increased demand for distance as Russian coal exports move to other destinations - possibly China, India, Southeast Asia and Turkey.

"However, Europe is now also facing the additional problem that some of its inland rivers are currently at low water levels, which will cause some trouble in transporting coal from large ports to power plants, and as a result, coal stocks are rising and could be a drag on imports in the short term."

Water levels on the Rhine are at their lowest point in 15 years, delaying barge cargoes. Meanwhile, coal stocks at ports in the Antwerp-Rotterdam-Amsterdam (ARA) region are already overflowing, even taking up iron ore warehouse space.

"But the demand for coal in Europe is too big for these supply chain bottlenecks to hinder demand," Alatari said. "There is no viable alternative" to the black stuff "because of it.

"All industries are trying to stockpile before the winter and reduce their reliance on gas before Russian supplies are further compromised," she said. "Ongoing logistical problems do mean that congestion at ARA ports will continue to increase in the coming months."

Analysts at French brokerage firm BRS believe that the bulk carrier market will become fragmented, and disconnected supply chains will become a long-term phenomenon.

In its report, the company said, "As we enter a new international trade order, the norms and rules of the past will continue to be upended, and such 'unexpected' changes regarding fleet route deployment will eventually become the new reality."