Russia coal, oil head to China as Japan, S Korea cut Russian imports

[BEIJING/SEOUL] Russian coal and oil paid for in yuan is about to start flowing into China as the 2 countries try to maintain their energy trade in the face of growing international outrage over the invasion of Ukraine.

Several Chinese firms used local currency to buy Russian coal in March, and the first cargoes will arrive this month, Chinese consultancy Fenwei Energy Information Service said.

These will be the first commodity shipments paid for in yuan since the US and Europe penalised Russia and cut several of its banks off from the international financial system, according to traders.

Sellers of Russian crude have also offered to give buyers in Asia's largest economy the flexibility to pay in yuan. The first cargoes of the ESPO grade bought with the Chinese currency will be delivered to independent refiners in May, according to people familiar with the purchases.

China has long bristled at the dollar's dominance in global trade and the political leverage it gives the US Efforts to chip away at the status quo are now being accelerated by Western steps to punish Russia for its war of aggression.

Moscow is offering rupee-rouble payments to Indian oil buyers, while Saudi Arabia is in talks with Beijing to price some of its crude in yuan.

It is unlikely the yuan will pose a serious challenge to the dollar's dominance, however, at least in the short term. The US currency was used for 88 per cent of foreign-exchange transactions in 2019, compared to 4.3 per cent for the yuan, according to the Bank for International Settlements.

Both steel-making and power-plant coal are being paid for in yuan, Fenwei said. These deals are traditionally done in dollars, but many Chinese buyers temporarily halted purchases after the US and Europe cut off Russian lenders from the Swift inter-bank messaging system.

Russia was China's No 2 coal supplier last year, filling the gap left by Beijing's trade tussle with Australia. Nearly half of the imports from Russia are metallurgical coal, which is in demand after the partial resumption of operations in the Chinese steel-making hub of Tangshan.

This type of coal isn't subject to government price controls that apply to power-plant fuel. While Chinese buyers are interested in importing more Russian supplies, logistics and financing barriers will ultimately cap the flows, the China Coal Transport and Distribution Association said last month.

The rouble, meanwhile, has recovered to levels where it was before the invasion of Ukraine. After plunging to around 140 to the dollar in early March, the Russian currency is now back near 80.

Meanwhile, at least 2 utilities in Japan and South Korea have halted Russian coal imports in recent months and others may have to follow suit and join a scramble for new sources if sanctions are expanded, analysts and company officials said.

The 2 nations combined take about 1/5 of Russia's coal exports, its biggest customers after China, and if the EU follows through on a proposal to stop using Russian coal they will likely face pressure for similar steps, intensifying the competition for limited alternative supplies.

"An EU ban would likely force importers in the EU, Japan and South Korea to cut their reliance on Russian thermal and coking coal," CBA analyst Vivek Dhar said in note.

Japan's Kyushu Electric Power had already stopped buying Russian coal as of end-March, a company spokesperson said, citing the risk of supply disruptions after initial sanctions on Moscow. The company bought 7 per cent of its thermal coal from Russia in the year to March of last year.

The utility is procuring alternative supplies from other regions, he added, without specifying where.

"We have no plan to buy Russian coal this financial year, either," he said.

In South Korea, at least one unit of state utility Korea Electric Power Corp (Kepco) began diversifying coal import sources away from Russia in February, a source with knowledge of the matter said.

"Our portion of Russian coal out of imports was small to begin with - about 10 per cent last year - and we've stopped ordering coal from Russia since February, diversifying to other regions,"said a source at the unit. The source was not authorised to speak to the media and declined to be identified.

"The situation is similar for other (Korean) power generation firms," the source added, but did not indicate which other regions they were turning to.

The European Commission on Tuesday (Apr 5) proposed new sanctions against Russia, including a ban on buying Russian coal, in response to its invasion of Ukraine. Russia calls its actions in Ukraine a "special operation".

"It will be very challenging for OECD nations to replace their coal imports from Russia," CBA's Dhar said.

"There is simply very limited spare capacity in thermal and coking coal markets." Top exporters Australia and Indonesia have already hit production limits amid a rush for non- Russian coal supplies in Asia and Europe that will keep global prices elevated.

Japan, the world's No 3 coal importer, has long-term plans to lower its reliance on Russian energy but has not instructed utilities to suspend coal purchases from Russia, an official at the industry ministry said.

"We are asking producing countries such as Australia and Indonesia for a stable supply just as we do on a regular basis,"he said.

"We understand some utilities have reduced procurement of Russian coal because of the risk to their business," he added, while noting some had also boosted their coal inventories.

Japan decided to continue its involvement in Russia's massive Sakhalin oil and gas projects, which it considers vital to its energy security.

Japanese companies, however, have been cutting their stakes in overseas thermal coal mines as concerns mount about coal's link to climate change.

Outside the energy sector, South Korean cement makers, which import about three-fourths of their bituminous coal from Russia, appear particularly vulnerable as they scramble to secure alternative supplies, according to 2 industry sources. They declined to be identified as they were not authorised to speak to the media.

"We had been grappling with rising coal prices since late last year, but now our biggest concern is if coal imports from Russia stop altogether," one of the sources said, noting that the industry only had enough inventory to last until May.

"The more cement we produce, the bigger the losses. But now, the worst case scenario is cement production might stop altogether if we can't get Russian coal." BLOOMBERG, REUTERS

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