Viewpoint: US steam coal exports shift to Europe

Europe may continue to dominate US thermal coal exports in 2023, as EU countries continue to block Russian coal and Moscow's drastic cuts to natural gas supply keep gas prices elevated.

But demand for high-sulfur coal may wane.

Europe passed Asia as the primary destination for US steam coal exports in August for the first time since November 2018. And it held that top spot the following two months, the latest US Commerce Department data show. By the end of October, US steam coal exports to Europe on a year-to-date basis had climbed to a four-year high of 10.4mn short tons (9.45mn metric tonnes), while volumes to Asia dropped by more than 6mn st to 13mn st.

The shift in US thermal coal exports in 2022 came as Europe continued to recovery from the Covid-19-induced downturn, a colder-than-normal winter and then Russia's February invasion of Ukraine. Higher natural gas prices also boosted coal-fired generation in Europe, while supply disruptions in other countries bolstered delivered coal prices, making the continent a more attractive destination for coal sellers.

At the same time, some other countries' appetite for US steam coal faltered, as prices rose and buyers in a number of those countries were able to take lower-priced Russian or Indonesian coal. Petroleum coke also held a competitive advantage over steam coal for cement makers.

Europe likely continued to be the top destination for US thermal coal in November and December. That could result in US volumes to Europe for all of 2022 being just shy of shipments to Asia.

For 2023 "all things unchanged, I think there will be good flow of US exports to Europe," one market participant said. He estimated it will be a mix of shipments that were put under contract in 2022 and new deals.

But the export picture is not entirely rosy. Prices have fallen from the records set in the middle of 2022, which could deter some US producers.

Also, while demand for low-sulfur coal could continue to be elevated in 2023, interest in US high-sulfur coal faces challenges in Europe. Generators on the continent historically have blended high-sulfur coal with Russian supply to bring sulfur levels down. While other countries serving European markets also have lower-sulfur coal, it tends to have a higher sulfur content than Russian supply, which has not been allowed to enter EU countries since 10 August. To keep sulfur content and emissions steady, generators that blend coal likely have decreased the amount of high-sulfur coal in the mix to 25pc from the typical 35pc as they ran out of Russian supply, one market participant estimated.

Low water levels also slowed coal shipments from terminals in Amsterdam-Rotterdam-Antwerp (ARA) and a relatively mild autumn and start to winter limited coal consumption. Now, "there is ample supply of high-sulfur coal in Europe," a utility buyer said.

In October, US exports out of New Orleans — which typically are mid- to high-sulfur Illinois basin coal — to Europe fell from year-earlier levels for the only the second time in 2022 and were the lowest since December 2021. Still, January-October shipments from the port district to Europe were at a four-year high of 5.7mn st.

Thermal coal exports out of Baltimore, Maryland, to Europe for the first 10 months of 2022 quadrupled to 2.22mn st, which is the most since at least 2012, as buyers in India reduced Northern Appalachian coal purchases.

If coal continues to be priced above petroleum coke, cement makers likely will continue to favor petroleum coke, further boosting competition to place Illinois basin and Northern Appalachian coal in Europe. Producers from both basins have announced plans to expand output next year, which would also put downward pressure on prices. But some of that increased output will go to domestic customers or could be scaled back if demand does not support supply increases.

Inventories of other types of coal in Europe also are elevated following buyers' moves to ramp up purchases of coal from other origins – including US low-sulfur coal - ahead of both the embargo on Russian and supply and the winter. On 18 December, inventories at the ARA hub's main ports totaled 6.2mn t, which was about 900,000t above the 2017-2021 average for mid-December.

"First quarter demand is going to be pretty gruesome because the reality is a lot of people have got a lot of stock at the moment," one market participant said. He still expects exports to Europe for 2023 as a whole to be flat with 2022 but noted demand likely will depend on how cold the winter is and how generators handle the lack of Russian natural gas imports.

At the same time, US supply of low-sulfur bituminous coal is somewhat limited and will depend on pricing. Producers this year extended the life of some Central Appalachian steam coal mines and washed high-volatile metallurgical coal to become thermal coal, as seaborne prices reached record highs. As European-delivered coal prices have fallen closer to $200/t cif ARA and lower, fewer offers of low-sulfur US coal are being made.

Producers remain committed to winding down more Central Appalachian thermal coal operations as soon as 2023. That could change if prices rise again, but US thermal coal exports likely to Europe next year may at best be flat with 2022.

By Courtney Schlisserman

US steam coal exports by continent st