The benchmark Newcastle thermal coal future prices have fallen to US$131/ton, the lowest price since June 2021. Though the current prices are down over 70% from the highs witnessed in September 2022; these are still materially higher from the pre covid 10yr average of close to US85/ton.
The sharp spike witnessed in the past couple of years was initially due to logistic constraints due to Covid-19 and was further exacerbated by the geopolitical issues presented by Russian invasion of Ukraine in early 2022. NATO’s economic sanctions on Russia, the single largest supplier of energy to Europe, resulted in a rush to secure energy supplies from the alternative sources, catapulting the prices of coal and natural gas, most common fuels used for power generation, sky high.
Now, since the supplies from other large coal producers, e.g, Indonesia, Australia and the US have improved materially, and European countries have built strong reserves, it is likely that the coal prices may remain stable or even decline further in the near future. Alongside correction in the thermal coal (used mostly in energy generation) the prices of metallurgical (met) coke, calcined petroleum coke (CPC) and coking coal (used by a variety of industry to fire blast furnaces, smelters, etc.) have also corrected, though in proportion to the thermal coal; easing cost pressures a wide spectrum of industries.
Some experts have forecasted the thermal coal prices to bounce back to US$175-200/ton range by the end of 2023 and stabilize there, though the World Coal Council believes that it all depends on how the economies of India and China would behave. July Ndlovu, chairman of the World Coal Association (WCA) and chief executive of South Africa's Thungela Resources (TGAJ.J), was recently quoted by Reuters saying “Europe's "disproportionate" role in deciding coal prices was over. Going forward ... what happens with China and India is what would drive the fundamentals for energy, because that's where growth and energy demand is". (see here)
Interestingly, while “peak oil” has been a regular topic of discussion amongst the market participants, the discussion on “peak coal” is not that popular. In a recent article Observer Research Foundation, highlighted that the sharp rise in coal demand in India may have pushed back the “peak coal” by a few years.
As per the article—
In 2020, the International Energy Agency (IEA), categorically stated that global coal demand peaked in 2014 and coal use in power generation is likely to peak before 2030. Coal use in China, which accounted for 50 percent of global coal consumption, was expected to peak around 2025. Global coal demand was not expected to return to its pre-COVID-19 levels and coal’s share in the global energy mix was expected to fall below 20 percent for the first time since the industrial revolution.
Though coal demand in India was projected to increase in the foreseeable future accounting for 14 percent of global demand by 2030, growth in coal demand was projected to be substantially lower than what was expected earlier. The IEA expected demand for coal (for power generation) in India to increase only by 2.6 percent annually till 2030. Some reports suggested that demand for coal for power generation in India peaked in 2018 and is unlikely to return to pre-COVID-19 levels given the high target set for RE by the government. Post COVID trends in coal demand growth in India suggests that this view reflected hope rather than reality (emphasis supplied).
In 2014, the year that was supposed to represent “peak-coal” according to the IEA, global coal demand was 5.680 billion tonnes (BT) in which thermal coal used for power generation accounted for 4.347 BT or over 76 percent. In 2021, global coal demand was 7.947 BT in which thermal coal demand was 5.350 BT. Coal demand growth stubbornly refused to oblige projections of peak coal in 2014. In 2021 coal demand was close to its all-time high contributing to the largest-ever annual increase in global energy-related carbon dioxide (CO2) emissions in absolute terms. (emphasis supplied).
Global coal use is set to surpass 8 BT for the first time in 2022 eclipsing the previous record set in 2013, according to the IEA. Globally higher natural gas prices amid the global energy crisis have led to increased reliance on coal for generating power. In China, the world’s largest coal consumer, a heat wave and drought pushed up coal power generation during the summer, even as strict COVID-19 restrictions slowed down demand. In India heat waves in 2021 and 2022 increased the demand for coal-based power for cooling and irrigation. The demand for coal-based power in India and elsewhere is likely to continue in 2023 as record heat waves are anticipated on account of El-Niño.
In spite of the ambitious clean energy targets, Coal continues to be a critical factor in India’s growth and development plans during the next decade. According to a government-appointed high-level committee headed by the vice-chairman of NITI Aayog to advise on liberalization of the coal sector, “coal is not to be viewed as a source of revenue but instead, be considered as an input to economic growth through the sectors consuming coal.”
The committee recommended that the government should focus on early and maximum production of coal and work towards its abundant availability in the market, especially to bring faster economic development to the ‘aspiring regions’ of the country.
Accordingly, ambitious targets have been set for domestic coal production, coal bed methane, and coal gasification. To attract investment, the government has opened coal resources for commercial mining and it expects that commercial production of coal will have a positive impact on the production and processing of steel, aluminium, fertilisers and cement.
Obviously, it will have an impact on a number of businesses, primarily producers, importers, users and transporters of coal. The most interesting would be to watch how the private competition impacts the public sector coal producers. For investment, I would be exploring mining equipment and coal logistics companies rather than the coal producers and consumers.
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