By Ulf Bergman
While iron ore prices continue their slide south as the leadership in Beijing continues to clamp down on the nation’s steel output, coal prices keep rising against a backdrop of robust demand growth and a tight supply situation. Recent days have seen new all-time highs set across many Asian coal markets. The limited coal supplies in many Asian countries are accentuating the global bull market across most power generation fuels, including natural gas and coal, which is fueled by the global economic recovery and LNG supply problems.
Despite global efforts to decarbonize, the appetite for coal remains as strong as ever. However, it is an increasingly Asia-focused trade, where it is still an important party of the energy mix. Ironically, the increasing reliance on wind power in some parts have also increased many Asian nationss’ dependence on the black stuff. In Europe for example, wind speeds have been below average so far this year, which has led to a greater reliance on natural gas. This has, in turn, pushed natural gas prices to a seven-year high, which has forced many countries to increase the use of coal for power generation in order to control rising energy prices. Hence, increasing demand and pushing coal prices higher. While increasingly unfashionable in the Western World, coal and other fossil fuels remain important in some quarters, such as Germany, and coal inventories in European ports are at the lowest for this time of year since 2016. With Germany more reliant on fossil fuels for its energy production than many of its neighbours, the rising coal and natural gas prices have also seen the country’s power prices surpassing 100 euros per megawatt-hour for the first time.
Natural gas (USD/MMBtu)
It is not only the spill-over effects of the short supply of natural gas and rising gas prices that are driving thermal coal prices higher. The global supply of coal remains under pressure and the volumes shipped so far this month are unlikely to match what was dispatched during August. If the second half of September behaves like the first, the global seaborne exports will fall well short of what was shipped during August. According to data from Oceanbolt, some 42 million tonnes have been shipped so far during the month which would indicate that the full month volumes would fall just short of 100 million tonnes. This would be an eighteen per cent decline on the preceding month and two per cent less than the same month a year ago.
Much of the month-on-month decline in global seaborne exports can be explained by a drop in Indonesian volumes. Adverse weather conditions and disruptions following one of Asia’s worst outbreaks of the coronavirus have put Indonesian coal exports on track for a drop by a third, compared to the previous month and some five per cent below the volumes during the same month last year. However, the infection rates in the country have been improving rapidly in recent weeks and should benefit export volumes.
The other behemoth in the global coal trade, Australia, has fared generally better than Indonesia. Despite the ongoing diplomatic fracas with what used to be the largest market for Australian coal, China, the country’s coal export volumes have held up remarkably well. Assuming a degree of linearity for the rest of the month, Australian coal exports would only be less than two per cent below the same month last year, which was before the import ban was imposed by Beijing.
The critically low inventory levels seen in many Asian countries, most notably in China and India, would suggest that the seaborne volumes are likely to recover and the weakness observed during the first half of September should be short-lived. The power plants in northeastern China are reported to have started to replenish their inventories ahead of the winter heating season, while the ones in the northern parts of the country are expected to follow suit during the coming weeks. Increasing safety inspections in many Chinese coal mines at the same time as supplies remain short would indicate that imports need to increase in the shoer term. The ongoing problems with parts of the border to Mongolia being closed due to coronavirus outbreaks are also likely to favour seaborne imports, especially if Indonesian production recovers.