LAUNCESTON: The price of benchmark Australian thermal coal rose last week to trade near record highs, providing a short-term boost to producers but increasing the risks of longer-term pain.
The Newcastle index, as assessed by commodity price reporting agency Argus, climbed to $258.59 a tonne in the week to Feb. 11, up from $246.34 the prior week and close to the all-time high of $261.11 from the week to Jan. 28.
Indonesian coal prices have also recorded strong gains since the country's government allowed most of its coal mines to resume exports after a ban in January, ostensibly to ensure sufficient domestic supplies.
The Argus index for lower-energy 4,200 kilocalorie per kilogram Indonesian coal jumped to $76.59 a tonne in the week to Feb. 11, up 32% from its 2022 low of $58.15 on Jan. 14, but still well short of the record $143.14 from October last year.
Australia, the world's second-biggest shipper of thermal coal used for power generation behind Indonesia, is seeing strong demand for the polluting fuel from traditional customers in north Asia, such as Japan and South Korea.
Chinese coal prices fall on state planner’s cooling measures
It's worth noting that the bulk of coal bought by these countries is sold under short- and medium-term contracts, and not at the weekly spot price.
This doesn't mean Japanese and South Korean utilities aren't paying high prices for their most of their supplies, but it is unlikely they are paying the current extremely high weekly index price.
To put the current price in context, this time last year the Newcastle Index was at $87.43 a tonne, having recovered strongly from its pandemic-low in 2020 of $46.94.
However, between 2012 and the middle of last year, the price had never exceeded $120 a tonne and had spent much of those years between $50 and $90.
This was a period where even though Asia's coal imports were experiencing strong growth, production was rising even faster as miners in Australia, Indonesia and Russia boosted output in the wake of the previous record high of just under $200 a tonne in 2008.
It was the boost to production that led to years of low prices, during which many miners struggled, before strong demand, especially from the world's top importers China and India once again created coal shortages.
The key question is how will the industry respond this time to high prices?
As much as the miners themselves may want to bring on new production, the challenges in doing so are far more serious now than they were a decade ago.
Supply to stay constrained?
In Australia environmental activism has progressed from small groups chaining themselves to coal-export equipment to sophisticated groups using court challenges and pressuring banks and investors to move away from coal. Coal miners are finding it harder to raise cash and insure projects, a trend likely to continue as climate change gains a bigger share of the public consciousness.
The Australian government's commodity forecaster in a December report on investment intentions in resources said that the value of coal projects dropped 7% between 2020 and 2021, compared with a 25% jump in that for critical minerals and 36% for gold.
Indonesia's coal export ban in January will also have rattled potential and current investors, with buyers also likely concerned about just how secure are their imports from the Southeast Asian nation in an era of rising resource nationalism.
Coal's mantra for much of the past two decades in Asia has been that it is a fuel of choice because it's cheap and reliable.
The current price surge, coupled with falling investment, undermines the cheap messaging, while the fickle nature of Indonesia's current government does little to inspire confidence in the reliability argument.
There is also the longer-term response to the current high prices from customers, both existing and potential.
While Japan and South Korea have little choice but to suck up the current high prices, given their energy needs over winter, the question remains as to whether they are likely to try and move away from coal faster.
While liquefied natural gas (LNG) is also expensive currently, largely due to Europe's shortage of natural gas, the longer-term view for the super-chilled fuel is more encouraging than for coal.
Then there is the lure of renewables backed by storage.
Not only do these energies such as wind and solar not rely on imported fossil fuels, they offer countries pollution advantages and most likely export advantages assuming carbon border taxes become a reality.
The opinions expressed here are those of the author, a columnist for Reuters.
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