Soaring electricity demand, infrastructure troubles and soaring global gas prices have fueled a dramatic rise in coal, the world’s least-favorite commodity.
The price of Australian thermal coal at the Port of Newcastle – the benchmark for the Asian market – has increased 106% year-to-date to more than $166 a metric ton, according to data from commodity pricing company Argus.
The weekly index at the Port of Newcastle once fell to $ 46.18 in early September 2020. Currently, the index is getting closer to the all-time high of $195.2 set in July 2008. The thermal coal index in South Africa closed last week at $137.06 per metric ton, up more than 55% this year.
In comparison, the price of Brent oil is one of the few assets that has recorded similar gains this year. The Brent contract is up 33% year-to-date.
The surge in thermal coal – which is used to generate electricity – raises several important questions about the “energy transition”. Coal, of course, is one of the most emitting fossil fuels and thus becomes an alternative target for other types of renewable energy.
However, many people continue to depend on fossil fuels to keep up with growing energy demands.
Outlook for thermal coal prices
Yulia Buchneva, director of natural resources at Fitch Ratings, says that thermal coal remains an important source of energy globally, noting that the fuel still accounts for more than 35% of the electricity generated globally.
“We expect that coal’s share in power generation will decrease because of energy transition programmes. However, this will have a lasting impact on the market. In the medium term, coal demand in emerging markets where there are few harsh environmental regulations, especially India and Pakistan, is expected to increase,” Buchneva said.
Meanwhile, Buchneva thinks that since the US and EU account for only 10% of global coal demand, the contraction in these regions will have limited impact on the global market.
When asked if thermal coal prices will rise further in the next few months, Buchneva replied: “The current high price of thermal coal is decoupled from cost and therefore unsustainable. We expect prices to normalize for the rest of 2021.”
Fitch Ratings assumes Australian thermal coal prices will fall to $81.
Energy analysts cite several reasons for the explosive rise of thermal coal. These include growing energy demand in China, Beijing’s unofficial ban on coal imports from Australia, supply disruptions in Australia, South Africa and Colombia, as well as rising gas prices globally.
As for gas prices, analysts at Argus say Europe has surprisingly low gas reserves, and imports of liquefied natural gas (LNG) are also low. This causes gas prices to increase more than coal prices and thereby create an incentive to use coal to replace gas in electricity production.