Coal-to-gas displacement in Europe will hurt Russian and US coal exports most
Beginning in 2018, low gas prices in Europe will cause a steady increase in coal-to-gas displacement. We expect low gas prices to displace around 10 million metric tons (MMt) per year of coal import demand by the end of 2019.
- Russian and US exports will bear the brunt. Russian exports to Europe are expected to decline by 5.8 MMt. Central Appalachian (CAPP) thermal exports will be essentially wiped out, losing more than 3 MMt, while Illinois Basin and Northern Appalachian exports will fall by about 0.7 MMt and 0.2 MMt, respectively.
- High-sulfur coal demand in Europe should remain strong, but there are risks. US high-sulfur coal is not expected to be heavily impacted, with European buyers indicating continued interest as long as prices are cheap. Exports are dominated by low-cost longwall-mined coal, which is additionally discounted. Furthermore, minimum contractual tonnages and/or sunk costs in rail, barge, and terminal contracts promote exports even at very marginal profit levels. However, if Russian producers can push delivered costs lower at all, the impact on US high-sulfur exports will likely increase.
- Are there other markets for displaced tons? We expect that growth elsewhere will provide markets for significant volumes of these tons. CAPP production will decline, but we expect Russian exports to the Pacific, the eastern Mediterranean, and the Indian Ocean to grow, while modest losses to US high-sulfur exports to Europe will be replaced by growth in exports to India, Latin America, and other smaller markets.
- The price impact is surprisingly neutral. Lost European demand is a bearish driver, but we expect little downward revision to our price forecasts, owing to a general tightening of supply, expected growth in India and Asia, and price-controlling regulations in China supporting prices should they fall.
James Stevenson is Senior Director, Global Coal at IHS Markit.
Posted 9 October 2017
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