Coal is seeing dramatic increase in demand as several large miners face production challenges, spiking prices from China to Europe and the United States
The prices of the dirtiest fossil fuels are skyrocketing as sweltering temperatures in North Asia increase the need for air conditioning, adding to already strong demand due to the industrial recovery from the pandemic. Mining safety concerns in China and heavy rainfall in Indonesia, meanwhile, are limiting production.
The surge in prices comes against a backdrop of the existential coal crisis, with climate policies making it increasingly difficult to invest in new projects. The squeeze might not change that, but it offers miners a boon while it lasts.
“We could have high prices in the fourth quarter,” said James Stevenson, senior researcher for coal, metals and mining at IHS Markit Ltd. in Houston. “But that’s not structurally strong demand. You’re probably better off enjoying the higher income than investing it in new production.”
As is often the case with coal, the story begins in China, which extracts and burns half of the world’s supply. As the first major economy to rebound from covid-19, factories there have been on the boil for some time, and this has recently received an extra boost as the recovery takes off elsewhere. However, a series of fatal mining accidents prompted Beijing to crack down on unsafe practices.
The resulting drop in production was exacerbated by the increase in electricity use in the midst of a warmer-than-normal summer, which followed extreme cold last winter. Higher demand forced several provinces to cut electricity supplies to factories in December, and more than 20 cities in southern China have done the same in recent weeks.
Coal prices have also been helped by problems, at least in part, from Beijing’s own manufacturing. The government refuses to accept coal from Australia, once its number two supplier, amid a geopolitical feud. China’s benchmark thermal coal futures hit a record high last month and are 60% higher than a year ago.
Indonesia, currently the primary source of coal for Asia’s largest economy, was hit by heavy rainfall. This saw total shipments drop about 15% below pre-virus levels, Morgan Stanley said in a note last week. Indonesian coal futures on the Singapore Stock Exchange also hit a record high in May.
Even with the import ban imposed by China, Australian coal futures are increasing thanks to purchases from Japan, South Korea and Taiwan. Spot prices for high-quality thermal coal in Newcastle Port hit their highest level since 2011 on Monday. The tip is spreading in Asia and around the world. Northwestern European coal jumped more than 6% last month and hit a two-year high last week. Spot coal in Pennsylvania is up 22% this year.
Goldman Sachs Group Inc. raised its 2021 and 2022 forecast for Newcastle coal last week due to strong demand and difficulty in licensing and building new mines in Australia. Morgan Stanley, on the other hand, expects the correction to decline in the Northern Hemisphere as it sees the market overshooting when supply begins to recover.
Even with increasing demand from China, IHS sees global consumption of thermal coal transported by sea at least 55 million tonnes lower this year than in 2019, as major users like India battle the virus. covid-19. While the market is tight in the near term, there is still sufficient capacity for later in 2021, Stevenson said. “This is a bad peak to invest in. Medium-term fundamentals are still bearish.”