Coal: Out of control!

Covid-related price lows in coal are reverting back with a vengeance and on the back of a spiralling demand, prices are surging. Since Aug-20, coal prices have recovered by 84 percent and are trailing three-year peak, and they are continuing to go up. Demand for power in recovering economies, particularly (and mainly) China brought on by an increase in industrial output post-lockdowns and cooling needs during sweltering heat is causing prices to ricochet back up.

It seems that growing environmental concerns have not affected coal demand too much. Energy mixes are evolving with renewables certainly winning the popularity contest. Advanced economies have vowed to make power using hydro, wind, solar and nuclear sources, relying less on coal. The US for instance is expected to slash coal’s contribution in energy production from the current 50 percent to 10 percent by 2025.

Investor interest has also been waning as the future looks toward green energy. South Korea has announced a green deal that would kill public financing of coal projects abroad while three of Japan’s private coal financing banks vowed to reduce coal financing. But kicking the coal habit may not be as easy for many economies as others, where coal consumption is still expected to grow.

The immediate trouble of soaring prices is coming from China, as it dominates the dirty fuel and the narrative. The biggest coal consumer has slashed production due to mining safety concerns while also banning imports from Australia due to politically fraying relations with the country which are unrelated to the commodity but oh, so relevant. Coal shipments from Indonesia have also been affected as the country’s production is affected by heavy rainfalls. This is all amid China’s growing demand. That means, Chinese producers are in a pickle who have a shortage in supply domestically as well as from its other sources.

Interestingly, Australia is one of the few net exporters to China, but Australian coal miners have not really suffered due to the China ban as they have managed to find markets elsewhere. Coal demand is aplenty and trade diversion has easily moved shipments to Japan and Taiwan so much so that, based on Australian forward orders, prices may continue to go up over the next few months. As more coal consumers come out of the covid-shock, demand will recover further which might mean a further upward trajectory for coal prices moving forward. No joys for coal importers for now.