High marine thermal coal prices increase the risk of renegotiations and buyer defaults

High sea thermal coal prices following Russia’s invasion of Ukraine increased the risk of contract default by price-sensitive buyers in Asia, as index values ​​rose significantly amid global supply shortage, market sources told S&P Global Commodity Insights on March 7.

Since the contracts are linked to the index and the index values ​​have increased for all grades and origins of coal, the sources considered a possible default by end users and buyers.
The development comes after coal prices surged amid buyers of Russian coal in Japan, South Korea, China and Europe looking for alternatives in Indonesia, Australia, South Africa and the United States. -United.

The price of 4,200 kcal/kg GAR in Kalimantan has increased by 27.6% since February 23, the day before Russia’s invasion of Ukraine, to reach $98.3/mt FOB on March 4 . The price of 5,900 kcal/kg GAR jumped 43.6% over the same period. , data from S&P Global showed.

Sources said some buyers, mostly from ‘price-sensitive’ markets like Vietnam, India and Thailand, are unwilling to pay prevailing rates in the short term as it is not commercially viable for them.

“I think the situation [of default] could arise not by choice, but by impotence. Buyers from some of these countries simply cannot afford the current prices, they cannot afford it,” said an Indonesia-based trader.

Traders based in India and Indonesia said such a price spike has now put the market in a risky position, where some buyers may be unwilling to honor contracts.

“Electricity prices are fixed or inflexible compared to the coal market, so it becomes unviable for electricity producers to buy at current prices. Either they have to stop production or they try to renegotiate,” said an Indonesia-based trader.

Australian coal prices also hit record highs amid rising demand from European markets. Newcastle NAR coal 5,500 kcal/kg with 23% ash reached $220/t on March 4 from $103.5/t on December 31, according to data from S&P Global.

“We heard hesitation in accepting the price and the shipments from people in India, but the shipments in question were then redirected to Europe,” said an Indonesian producer.

Market participants expect demand from Europe, Japan and South Korea to offset rising price jitters in Southeast Asia and India.

Sources estimate that Russia exports about 40 million tons a year to Europe and China. Its exports to South Korea and Japan also amount to just over 10 million metric tons per year.

Market sources expect the current volatility to continue for a few weeks as the Russian invasion of Ukraine continues, while sanctions and new rules roll out for the new trade dynamics.
Source: Platts