As the entire world aims to minimize carbon emissions, no one could have anticipated that this environmentally harmful fuel would suddenly “take a giant leap.”
Coal prices have surged once again, and global coal consumption is expected to return to record levels achieved nearly a decade ago, amidst an ongoing global energy crisis. According to analysts, while many investors in coal reserves rejoice over rising prices, the focus on reducing carbon emissions has been sidelined. This situation arises as markets and governments scramble for traditional energy supplies amid shortages caused by the Russia-Ukraine conflict.
Moreover, the slowdown in investments in new coal-fired power facilities has tightened coal supply, said senior analyst Peter O’Connor of Shaw and Partners. “Who would have thought that dirty coal would become the best-performing stock in the last financial year? Up until this financial year, it has also been the best-performing sector,” O’Connor stated. “And looking ahead to the coming year, with the Northern Hemisphere winter, gas prices in Europe, and available gas supplies, countries are turning back to coal.”
He analyzed: “Coal supply is scarce. Why? Because no one can produce coal, and markets will remain tight due to weather conditions and COVID-19. Therefore, coal prices will remain high for an extended period, possibly until the calendar year 2023.”
Coal prices began to rise after the Russia-Ukraine tensions started.
The price of coal used for thermal power generation has increased by approximately 170% since the end of last year, following the onset of the Russia-Ukraine tensions. In contrast, coking coal, a raw material for steel production, is priced lower. Various factors, including the cooling economic growth in China, have led to a slowdown in the steel manufacturing sector, thereby reducing the demand for coking coal.
The International Energy Agency (IEA) released a new report on August 3, warning that global coal consumption is projected to increase by 0.7% in 2022, reaching record levels set in 2013. This is expected to occur if the Chinese economy recovers as anticipated in the latter half of this year. “Global coal consumption will hit the record levels established in 2013, and coal demand may increase further next year, reaching an all-time high,” according to the IEA’s Coal Market Update.
The IEA stated: “This strong increase has contributed to annual CO2 emissions reaching the highest levels in history.” According to IEA data, global coal consumption rebounded by about 6% in 2021 as the global economy recovered from the shock of the COVID-19 pandemic.
The primary reason for the continuous increase in coal demand is the energy shortage as the European Union is determined to eliminate Russian gas, and Russia has retaliated by cutting supplies to the continent. Consequently, coal consumption in the EU is expected to rise by 7% in 2022, surpassing last year’s increase of 14%, the IEA noted.
“This is driven by demand from the power sector, where coal is gradually replacing gas as this fuel becomes increasingly scarce and experiences significant price hikes,” according to the IEA. “Some EU countries are extending the lifespan of coal plants that were scheduled for closure, bringing back closed plants into operation, or increasing operational hour limits to reduce gas consumption.” At the same time, the boycott of Russian coal is also exerting additional pressure on coal prices, the agency reported.
Commodity analysts Daniel Hynes and Soni Kumari from ANZ Research analyzed: “What Europe feared most became a reality this week after Russia cut gas flow capacity through the Nord Stream pipeline by 20%. The gas reserves may not be sufficient for them to get through the winter. Given Europe’s limited ability to import alternative supplies, the region is likely to face fierce competition for LNG shipments.”
The global gas market, including the Asia-Pacific region, is experiencing a significant shock. On August 3, Japan’s Nippon Steel Corporation signed a deal with mining and trading giant Glencore to supply coal at a price of $375 per ton. This is the highest price a Japanese company has ever paid for this commodity, according to Bloomberg.
Overall, rising energy costs continue to contribute to increasing global inflation, forcing central banks to tighten monetary policy. The U.S. Federal Reserve raised interest rates by 75 basis points on August 3, marking the latest move in a series of rate hikes aimed at curbing inflation.
