There is a new energy kid on the block. Well, not new, exactly. It is actually an older resident who has moved back into the neighborhood after much demand from the community. Coal prices are throwing a house party like it is 2008 again, with international consumption for the fossil fuel as hot as Ukraine President Volodymyr Zelensky right now. The problem? The dirty rock is in short supply after the world turned its back on an energy source that contributed to the global economy’s prosperity and innovation for so long. But coal is having the last laugh as many advanced and developing economies try to keep their lights on in this contentious and chaotic environment. So, is this coal’s last hurrah?
Energy Market Under Pressure
(Photo by Rolf Vennenbernd/picture alliance via Getty Images)
The Asian benchmark for coal skyrocketed 46% on March 2 to an all-time high of $446 per ton. The Australian Newcastle coal surged to a record $400 a ton, climbing from around $240 in a few trading sessions. These prices have allowed producers to see stocks rally, like Whitehaven Coal and Coal India rising 11% and 7%, respectively.
As Liberty Nation has reported, the value has been surging over the last year as many countries are running out. Some businesses bought coal for 2022 and 2023, anticipating soaring costs and intense demand. They were right. However, the meteoric ascent has been pronounced over the last week, with consumers concerned that the Ukraine-Russia military conflict would interrupt global flows amid disruptions to transit routes, logistical problems at seaports, and restrictions on financial institutions. "Buyers in markets including Europe, Japan, South Korea, and China are scrambling to address their exposure to Russian supply," said Wood Mackenzie Ltd. in a Thursday note.
Although Australia and Indonesia have ramped up output capacity, Russia is the world's third-largest exporter of coal. With countries finding it hard to secure financing for purchases because of the SWIFT ban, it is going to be much more challenging to gather supply. But China has become the biggest importer of Russian coal due to its trade war with Australia, while Europe has significantly increased its purchases because its energy inventories are putrid.
Reports suggest that some traders might want to go as far as paying for cargoes in yuan rather than the dollar, a considerable development in the global de-dollarization trend. For now, trade has been “put on hold” until the method of payment is agreed upon by the parties involved. But it is safe to say that exceptions will be made considering how hungry the world is for fuel, and any interruption to production and shipments would damage both sides of the transaction.
Will this mean buyers will be forced to use China's SWIFT alternative, CIPS? Or will they rely on Russia's onshore clearing and settlement system, SRPS? Either way, another layer of importing and exporting coal will slow down trade and further add pressure to prices.
Whatever the case, Beijing is ostensibly going to lower the price of coal through government price-fixing, according to the National Development and Reform Commission (NDRC). China's premier economic planning agency has erected a "reasonable" price range for thermal coal prices, establishing the benchmark for 5,500 kcal thermal coal at Qinhuangdao Port to between $86.98 and $121.77.
“Setting a price range does not mean that we are going back to government pricing,” said Wan Jinsong, director of NDRC’s price department. “When the coal price falls or rises excessively beyond the reasonable range, it will bring adverse effects and even endanger security and stable supply of energy. There have been many lessons in recent years.”
America’s Coal Country Is Back?
The rumors of Coal Country's death have been greatly exaggerated. The U.S. coal industry is reporting either record profits or their best performance in several years. Despite the federal government vilifying the sector, it has come back with a vengeance as approximately 90% of the nation's production feeds power plants. But the record-high prices unfolding in the United States are not enough for major energy firms and utility giants to reconsider their decision to shut down coal-fired power plants. These entities have announced plans to phase out coal generation, arguing that it has become a socially unacceptable form of power to public policymakers and investors.
“Maybe they’ve gotten a reprieve for a year or two here with coal prices being up as much as they are, but they’re going to be very shortly facing that kind of brutal economics once again as coal demand drops,” said Seth Feaster, an analyst at the IEEFA, in a report.
Perhaps they would not feel the same way if they endured rolling blackouts like in China, India, South Africa, and Venezuela. It is always easy to look down from a comfortable seat in an ivory tower. Coal’s revival may be short-lived, or perhaps it has been given a new lease on life amid green energy’s failure to provide enough power to households and businesses when needed most. Once again, that dirty rock has rescued the public from the pits of darkness and, in some cases, destitution.
A Commodities Supercycle
The global economy is witnessing a commodities supercycle. Every hard and soft commodity is climbing, from crude oil to wheat. Indeed, agriculture, energy, and metals were forecast to climb in 2022 because of tight inventories and lackluster production amid strengthening global demand. The crisis in Eastern Europe merely exacerbated everything plaguing the markets. The coming U.S. consumer price index (CPI) reports should leave everyone hoping that Christmas comes every day and Santa Claus visits households with lumps of coal. This is the only way to beat inflation.
~ Read more from Andrew Moran.
