Business Maverick

Business Maverick

It’s Not Over Yet for Coal as Global Prices Surge on Hot Demand

Stacker-reclaimers operate next to stockpiles of coal at the Newcastle Coal Terminal in Newcastle, New South Wales, Australia, on Friday, March 26, 2021. The one-in-100 year flooding event in Australia in recent days forced coal producers from Glencore Plc to Yancoal Australia Ltd. to cut output, while Whitehaven Coal Ltd. said there is a backlog of ships at the key Port of Newcastle export terminal.

Coal is seeing a dramatic spike in demand just as several major miners are hit with production problems, sparking a surge in prices from China to Europe.

Prices for the dirtiest fossil fuel are soaring as hot weather in North Asia raises air conditioning needs, adding to already strong demand due to the industrial recovery from the pandemic. Mine safety issues in China, heavy rainfall in Indonesia and disruptions in Colombia are constraining output.

The price spike comes amid an existential crisis for coal, with climate policies making it increasingly difficult to invest in new projects. The squeeze might not change that, but it’s providing miners with a windfall while it lasts.

Futures surge amid recovery from the pandemic

“We could have strong prices into the fourth quarter,” said James Stevenson, lead researcher for coal, metals and mining at IHS Markit Ltd. in Houston. “But this isn’t structurally strong demand. You’re probably best optimized enjoying the higher revenue than investing it in new production.”

As is often the case with coal, the story begins in China, which mines and burns half the world’s supply. As the first major economy to rebound from Covid-19, factories there have been running hot for a while, and that’s recently been given an extra boost as the recovery takes off elsewhere. However, a spate of deadly mining accidents has spurred Beijing to crack down on unsafe practices.

The resulting drop in output has been exacerbated by rising electricity consumption amid a hotter-than-normal summer, which followed extreme cold last winter. Higher demand meant several provinces had to curtail power supply to factories in December, and more than 20 cities in southern China have done the same in the past few weeks.

Coal prices have also been aided by problems at least partially of Beijing’s own making. The government refuses to accept coal from Australia, once its No. 2 supplier, amid a geopolitical spat. China’s benchmark thermal coal futures hit a record last month and are more than 50% higher than they were a year ago. Futures dropped Friday, falling as much as 5.9%.

More Coal Coverage

Indonesia, currently the No. 1 source of coal for Asia’s largest economy, has been hit by heavy rainfall. That’s seen total shipments drop about 15% below pre-virus levels, Morgan Stanley said in a note this week. Indonesian coal futures on the Singapore Exchange also rose to an all-time high in May.

The Cerrejon mine in Colombia has been hit by blockades of a rail line and port last month. The company said May 30 that it would be gradually reopening.

Even with China’s import ban, Australian coal futures are surging thanks to buying from Japan, South Korea and Taiwan. Spot prices for high-quality thermal coal in the port of Newcastle rose to the highest since 2011 on Monday.

Europe, U.S.

The spike is rippling out of Asia and across the globe. Northwest European coal are up around 20% this year and reached a two-year high on Tuesday.

European prices have rallied this year due to colder-than-usual weather on the continent and a drawdown in stockpiles at ports, said Matthew Boyle, head of coal and Asia power analytics at S&P Global Platts. “There have been disruptions with Colombian exports, which is a large supplier into Europe, whereas Russian coal has been diverted toward Asia,” he said.

The global boom is unlikely to benefit producers in the U.S., where the rise in prices has been more modest. American miners historically have been eager to export, but many aren’t in a position to take advantage of the surging prices. They’ve been scaling back as power generators buy less coal amid a shift to renewable, and have also been hit with labor shortages due to the pandemic.

U.S. production in the first quarter was down 6.9% from a year earlier, which means many of the big suppliers simply don’t have much tonnage available to ship overseas, said Andrew Cosgrove, a mining analyst with Bloomberg Intelligence. “These guys are not looking to ramp,” he said.

The question now is, how long will the global price rally last? Goldman Sachs Group Inc. raised its 2021 and 2022 forecasts for Newcastle coal this week on demand strength and the difficulty of permitting and building new mines in Australia. Morgan Stanley, on the other hand, expects a correction in the northern fall as it sees the market in surplus when supply begins to pick up.

Even with rising Chinese demand, IHS sees global consumption of seaborne thermal coal at least 55 million tons lower this year than in 2019 as major users like India battle the virus. While the market will be tight in the near term, there’s still ample capacity for later in 2021, Stevenson said. “This is a bad spike to invest into. Mid-term fundamentals are still bearish.”

Gallery

Comments - Please in order to comment.

Please peer review 3 community comments before your comment can be posted

X

This article is free to read.

Sign up for free or sign in to continue reading.

Unlike our competitors, we don’t force you to pay to read the news but we do need your email address to make your experience better.


Nearly there! Create a password to finish signing up with us:

Please enter your password or get a sign in link if you’ve forgotten

Open Sesame! Thanks for signing up.

We would like our readers to start paying for Daily Maverick...

…but we are not going to force you to. Over 10 million users come to us each month for the news. We have not put it behind a paywall because the truth should not be a luxury.

Instead we ask our readers who can afford to contribute, even a small amount each month, to do so.

If you appreciate it and want to see us keep going then please consider contributing whatever you can.

Support Daily Maverick→
Payment options

Become a Maverick Insider

This could have been a paywall

On another site this would have been a paywall. Maverick Insider keeps our content free for all.

Become an Insider

Every seed of hope will one day sprout.

South African citizens throughout the country are standing up for our human rights. Stay informed, connected and inspired by our weekly FREE Maverick Citizen newsletter.