LONDON — Coal exporters face a tough year without the cushion of forward selling at higher prices that helped get them through 2009, and with their familiar problem of high rail transport costs persisting.
Exporters may have to cut production as they did in 2008-09 if prices slump and they cannot shift coal to Asia.
Russia, one of the world's top five coal exporters to Europe and Asia, will ship about 8 percent more thermal coal in 2010 than last year but will battle for more than a slim profit margin, analysts and exporters said.
"For most Russian Baltic suppliers, cash margins will be tight again in 2010," said Peter Doyle, an analyst with consultancy Wood Mackenzie.
"Their willingness to supply will be tested, particularly if they cannot get significant volumes to release through the Far East where their margins will be better," he added.
Exporters struggled through 2009 because they had sold coal in advance at higher levels than spot prices and they diverted spot coal from glutted Europe to voracious Asia.
This year they have been compelled by their European main buyers to accept more index-linked, floating pricing.
SUEK, the country's biggest exporter, has become adept at selling against the API2 index of delivered Europe prices and hedging to fix prices when spot levels are attractive.
Other exporters are slowly following SUEK's lead, but in the meantime floating prices leave their already-vulnerable margins in greater danger.
"For Baltic ports, I do not think the prices will be much better than $76 a metric ton FOB for the year, but $100 FOB is being paid in the Pacific," one major exporter source said.
At current spot European prices of $75 to $78 a metric ton, Russian coal is more than $10 per ton too expensive, and cheap Colombian coal is being shipped into Europe in large quantities.
"Colombia's Cerrejon and Drummond still have a significant cost advantage over most Russian suppliers into ARA," Doyle said.
Europe will be the least profitable market for Russian coal this year because of oversupply, weak demand in general and pockets of extremely weak need in Spain and Britain.
Russia is hampered by the highest costs in the world, which make its coal perpetually vulnerable to sharp price falls.
The principle cost is transporting the coal by rail from Siberia in the center of the country thousands of kilometers to any port.
Russia's coal cash costs rose to $70 to $75 a metric ton by the end of 2009 from $60 to $70 a year earlier.
The cost per metric ton per kilometer to transport coal by rail is among the world's lowest, but the sheer distance inflates the cost.
Logistical port and rail constraints also prevent Russian sellers from diverting more than 28 percent to 30 percent of coal from Europe to Asia where demand and prices are much stronger.
"They need to sort out all the bottlenecks on the railway east of Ulan Ude and to get their ports working efficiently before exports will reach their full potential," Doyle said.
Seaborne thermal coal exports will be at least 70 million metric tons in 2010, up from 65 million in 2009 and could be as high as 75 million if Pacific port and rail systems can cope and if the demand is there, exporters said.