The decline of the Russian rouble is having a negative impact on Australian thermal coal exports in the Asia-Pacific region. Once the sole domain of Indonesian and Australian coal, the Asia Pacific region is now importing Russian coal at an increasing rate.
Without the drop in the value of the rouble, Russia stood to supply a modest 17% of the coal demand in the region. With it, and the associated drop in its coal price, the share has skyrocketed to 35% of total demand.
There are two factors behind this shift.
The first is that the rouble is undervalued – that helps Russian exporters. The lower the value of a currency, the cheaper its goods are. And cheaper goods attract buyers. That’s what we’re seeing developing now.
The second is that transportation costs are falling. Low fuel prices are opening up new trade relations that were once too expensive. While shipping by sea remains the cheapest way to trade goods, Russia’s proximity to Asian markets allows them to take advantage of lower fuel prices by land too.
On top of this, coal prices are low, which makes the job of competing against Russia more difficult for Aussie exporters. Shipments of thermal coal from Newcastle were selling at US$70 a tonne in February. Energy consultants Wood Mackenzie predict that real prices will rise by only US$1 to US$2 a year leading up to 2020. And with the international market flooded with coal, the surplus of supply should keep prices low for the foreseeable future.
We have a situation in which it’s cheap for producers to export coal, but where profit margins are smaller. That’s the outcome of a depressed energy market. And it makes competing with Russia a more difficult task.
How Australian coal exporters can fight back against Russia
The remedy to help prevent further setbacks in the race to supply Asia with coal is likely to come in two ways.
A weaker Aussie dollar may go some way in fixing the situation. But while further dollar devaluations can be expected, it is unlikely to be enough unless the Russian rouble readjusts upward.
The other, more likely, scenario is that Aussie coal producers will enact cost cutting measures. That’s the easiest way for them to reduce costs and increase profits. It may ease some of the pressure on the bottom line. And that may be the only way to regain some of the ground that has been lost to Russian coal.
Contributor, The Daily Reckoning