Europe Coal Surges as Traders Try to Buy From Anyone But Russia

(Bloomberg) -- European coal surged to historic highs as sanctions against Russia for its assault on Ukraine tighten the global market, driving traders to look elsewhere for the commodity.

The sanctions have triggered intense concerns over the ability of European utilities to get their hands on coal from Russia, which supplies more to the region than any other country. Even with the continent's coal stockpiles at a historic low, high natural gas prices mean it's still more profitable to burn coal than gas to produce power.

Benchmark annual futures jumped as much as 32% to $200 a ton on Tuesday, the highest since 2008. Month-ahead prices rose as much as 38% to hit a record high of $322.50.

Many European utilities have started bidding for coal in South Africa as they are concerned they won't be able to get supplies from Russia, according to one coal trader who wasn't authorized to speak publicly. Last week, EU coal stock levels dropped to as little as 2.56 million tons, the lowest since Argus Media started compiling figures in 2014.

“We believe that Colombia and South Africa and some current U.S. supply will react first to the immediate need for any replacement tons in Europe,” said Wendy Schallom, senior coal and power analyst at S&P Global Platts.

“Should the conflict and disruption last longer, however, it will be the U.S. which will need to ramp up exports to supply the bulk of the replacement tons – as they have renewed ability to bring back additional production,” she added.

As European gas prices surge due to supply fears triggered by the war and related sanctions on Russia, the continent's utilities are eager to source gas and coal from alternative markets.

“We have business relationships with a number of Russian counterparties that we trade with on energy wholesale markets,” Swedish utility Vattenfall AB said in a statement on Tuesday. “For coal we are taking steps to further diversify our sourcing portfolio.” The company sourced coal from Russia, the U.S and Poland between 2018-2020.

However, there are limited alternatives to Russia as sources of coal for European generators. In 2020, 49% of the EU's imports came from Russia, according to Eurostat, with the majority destined for Germany.

Sanctions come of top of the coronavirus pandemic causing staff shortages in Russia, which has slowed the shipment of coal on the country's railways. China is also shunning the commodity from Russia. At least two of its largest state-owned banks are limiting finance for Russian commodities due to the sanctions.