How far can coal go further?
Greta Thunberg, look away now. Coal prices have hit historic highs lately, although they rose long before Russia invaded Ukraine. Now, a perfect storm of surging near-term demand and ongoing supply issues mean prices could rise further.
It all started in late 2020, when China effectively banned imports of Australian products, including coal, as punishment for Canberra’s decision to support an investigation into the origins of Covid-19. BMO Capital Markets summarizes where we were:
Around this time, two years ago, marine thermal coal prices languished at around $50/t FOB Newcastle, with many in the industry believing that this “dirty” fuel had begun its inexorable march towards retirement. It was one of the worst years on record for bankruptcies in the coal sector. At the time, forecasting a return of prices north of $100/t seemed ambitious.
The bad times didn’t last. China’s electricity consumption soared after lockdown measures were lifted, while demand started to pick up elsewhere as economies resumed in early 2021. Growing global energy needs have been frustrated by a particularly tight market for liquefied natural gas and unfavorable weather conditions for renewable energies. Lacking alternatives, the world has reluctantly turned to its dirtiest fossil fuel.
Last year, coal demand ended up exceeding 2019 levels by 6%, according to BP’s latest global energy statistics report. China and India – the world’s two largest producers and consumers – accounted for more than 70% of the additional appetite. Coal-fired power plants still power more than a third of the world’s electricity production.
In the second quarter of the year, it was becoming increasingly clear that the world was running out of coal. As BMO explains:
No matter where you point on the map, supply disruptions have limited production. In Indonesia [the world’s fourth biggest producer], the largest exporter of thermal coal, severe flooding in Kalimantan and Sumatra led several producers to declare force majeure in the third quarter. . .
In Australia, thermal coal exports did not exceed 200 Mt for the second consecutive year in 2021, after being consistently above this threshold from 2013 to 2019, largely due to heavy flooding in New Wales. South and Queensland, and high absenteeism linked to COVID-19. Additionally, a storm that derailed a ship loader at the port of Newcastle reduced export capacity by 1.25 Mt/month from November 2020 to the end of July 2021
Newcastle coal prices are now just below $400 a tonne, inflated by the war in Ukraine and the subsequent EU ban on most Russian oil imports. Anticipating Putin’s recent decision to cut supplies of already very expensive natural gas to countries such as France, Italy and Slovakia, and ahead of the ban on Russian coal due to come into force in August, Brussels gave last month gave the EU the go-ahead to fire up its own mothballed coal-fired power stations.
Austria, Germany, Italy and the Netherlands say they have no other choice. Imports from the United States, South Africa, Australia and Colombia are expected to increase accordingly, and the European Commission now expects the EU to use 5% more coal than expected in over the next five to ten years.
Russia, for its part, is unlikely to be affected by the EU ban given how many other countries still want what it sells. China, for its part, “imported 54Mtpa of coal from Russia in April, which represents a near doubling of March levels and the highest level on record,” BMO said.
Europe and coal-dependent emerging markets, on the other hand, could well suffer. Many of the issues that have hampered coal supply in 2021 have yet to be resolved. Transnet, South Africa’s government-controlled rail network, has been “underfunded and underperforming for years, capping the country’s export capabilities,” said Liberum analyst Tom Price.
South Africa’s biggest export port, Richards Bay, has a cargo capacity of 91m tonnes but is struggling to get more than 70m tonnes out of the country due to rail problems, Price said .
Cement and steel mills in Pakistan, which imports 70% of its thermal coal from South Africa, “are operating at significantly reduced capacities or temporarily closing factories”, according to S&P Global. And despite ordering domestic coal producers to increase production, President Xi Jinping said China would drop funding for overseas factories.
In the United States, where domestic coal prices have reached nearly a decade highs, a shortage of railroad workers has led to a “historic” reduction in inventories at power plants, said John Ward, executive director of National Coal. Transportation Association. “We are currently in the midst of a rail service collapse which has reduced deliveries of all commodity groups, including coal.”
The problem “doesn’t seem like it’s going to end anytime soon,” Ward added. “The railroads aren’t throwing money at their workers and their current relationship with unions is not what you would call friendly.”
Uncertainty around deliveries ‘likely to increase volatility [coal] price rather than leading to a sustained increase,” Price said. “The thing with the energy markets . . . is that they very quickly signal to the price signal any kind of supply constraints, so I would say a lot of [bottlenecks] As soon as the war broke out, people started adjusting prices to reflect risk.
Others are less certain. From Jefferies:
Lack of investment in new mines, depletion of existing mines and under-investment throughout the supply chain have been key factors in the tightness of the coal market. Most mining companies are unwilling to invest in new coal capacity due to structural demand risks and the ongoing ESG surplus. The resurgence of the global coal market is real, in our view, and there could be more price increases this summer
All of this has naturally been a boon for coal miners and companies that transport goods by land and sea. Swiss company Glencore is expected to reap first-half coal ebitda of more than $8 billion, while shares of US excavators Peabody Energy and Arch Resources are up 226% and 170% respectively over the past year.
Can’t wait for COP 27.