Australia’s thermal coal at Newcastle Port, the benchmark for the vast Asian market, has surged over 100 percent this year to trade above $166 per metric ton. This is an all-time high for the Newcastle weekly index since July 2008. The index had slumped to $46.18 in 2020.
The South African equivalent of this index, the Richards Bay index, closed at $138.50 Monday, up over 70 percent this year.
To put this rally in context, let’s compare it with another commodity that has seen some major action this year – crude oil. Crude oil futures for delivery in Oct-Nov have surged over 50 percent this year.
What is happening?
Thermal coal – that powers plants to boil water, create steam, spin turbines, and generate electricity – has more than doubled over the last year.
Why does this matter?
The rally comes when governments are repeatedly touting their commitment to the demands of the deepening climate emergency. This raises questions about our transition from carbon-intensive fuels.
Coal is the most carbon-intensive fuel there is, it releases high emissions that are lethal at a time when Earth’s carbon dioxide levels are at peak in the past 3.6 million years.
S&P Global expects coal-related carbon emissions to rise by 17 percent this year.
What is fuelling this rally?
Rising electricity demand, infrastructure woes, and rising natural gas prices are triggering the hike in price.
A rebound in the power demand in China, Beijing’s informal ban on coal imports from Australia, supply disruptions in Australia, South Africa and Columbia, and rising natural gas prices have triggered this hike.
Natural gas prices have been rising across the world due to a shortage of gas globally. Weak liquified natural gas imports and modest pipeline imports from Russia are also contributing, making the commodity costlier than coal. These rising gas prices are also acting as an increased incentive to burn coal rather than gas.
Furthermore, the supply of coal is crimped by a closed mine in Colombia, flooding in Indonesia and Australia. Beijing has informally banned Australian imports, distorting the trade flows and fuelling the coal price rise. China’s actions came after Australia called for an international inquiry into the origins of COVID-19. Australian cargoes have now been pushed towards the Pacific, adding to the price rise in Asia.
The jump in the European coal prices is most surprising, however. This comes at a time when the continent’s market for carbon offsets is also surging. The prices for the European Union emission allowances have risen as high as 70 percent.
In theory, these two phenomena should not occur together, the increase in offset prices should cool the demand for coal. Rather the consumption has risen as the prices of gas and power have also jumped.
What are the secondary effects of the rise in coal prices?
Now since natural gas and coal, are surging, the price of electricity in the US and Europe have increased too. This is a contributing factor in rising inflation in the US, which saw the biggest 12-month inflation spike since 2008.
What is the near-term outlook for coal prices?
The prices are expected to stay higher for the next few months as supply keeps shrinking. “Supply is shrinking and it is probably shrinking faster than the demand,” Tom Price, the head of commodities strategy at Liberum told WSJ.
In the near term, analysts say the lack of investments in the new supplies, coupled with rising demand across the world could lead to a spell of higher prices.
What is the long-term outlook for coal producers?
For coal producers though, the long-term outlook is not encouraging. Recently, Leaders at the Group of Seven (G7) summit said coal emissions were the biggest source of carbon emissions. They pledged to double down on efforts to cut back on the fuel.
However, for now, the coal demand is surging.
Source: CNBCTV18
