Coal chills!

China’s coal inventories are drying up amid demand that is booming and will continue to head upwards as winter arrives. The country’s September stockpile was record low, able to meet only 15-daysworth of required coal. This is leading to a fresh burst in price bump as China’s insatiable need for the dirty fuel becomes more and more precious. China is now rationing electricity and intends to re-open some old coal mines but this does not mean China’s demand for imported coal will simmer down.

This is causing supply shortages everywhere at a time (including Europe and India) when global demand, not just China’s is in massive recovery as industrial activity and power needs resurface post-covid. Prices are hurtling forward. Newcastle Coal that benchmarks coal prices in Asia climbed to $238 per ton— last recorded number — highest ever witnessed by that index. South African Richard Bay coal prices are trailing $185 per ton which is 228 percent higher than prices recorded in Apr-20 (read: “Coal calls”, Oct 1, 2021).

Recall that China had halted imports from Australia as political relations frayed. China began importing from Indonesia which was then hit with production halts due to heavy rainfalls. Pandemic-borne logistics challenges elsewhere such as Russia and South Africa have been further tightening supply. Both China and India that had been cutting down production of coal are course-correcting. Banks in China have been instructed to provide financing to coal mines. Once these plants are running again, the looming power crisis in the country may be kept at bay but not before sending prices on a spin in the interim.

The situation here at home is tense, with no respite from South African coal prices (See graph). Cement manufacturers — major coal users — have been raising prices for cement bags to pass on some of the effect of rising cost of coal. Estimates by BR Research suggests that cement prices could be raised by Rs132 and above (read more: “Cement’s coal play”, published on Oct 5, 2021) if they producers were to keep margins intact. That is likely not possible as pressures from many quarters including government to hold off price hikes are strong. Cement makers will have to maintain their nerves and increase prices gradually. Prudent inventory management might also entail limiting coal consumption and in turn, cement millers may produce less if it makes more economic sense to do so.