Thermal coal, ‘the world’s dirtiest fuel’, may be having a rough time. Prices are down, Chinese demand, which typically ‘gobbles up over half the world’s supply’, is lukewarm de to surges in hydropower ‘squeezing out’ fossil fuels. Mining stocks trade at a huge discount and international negotiations are fast being made to cut such emissions. However, the Economist notes the ‘embers of thermal coal remain uncomfortably hot’. Coal prices have stabilised at higher real prices since the war with Ukraine, and compared to the ‘economic wobbles, war and weather shaking many commodities’, coal has remained comparatively ‘placid’.
Despite ‘formidable challenges’, coal stocks are up! Europe’s ‘mad restocking’ has left its reserves 65% full, China has a ‘healthy’ ‘stash’ and supply has shot up over 10% in two years, with China hitting records in output as the nation aims to reduce dependence on imports. Russia has redirected the 50 million tonnes of coal, 3% of globally traded volumes, it once sold to Europe. All this amid a ‘tepid’ global economy from sluggish growth in China, a strong dollar and high interest rates.
In the political realm, the strong will to push for a green transition is reducing its consumption, especially in rich countries. In 2023 the US and the EU reduced coal consumption by 21% and 23% respectively. To reduce pollution, China, too, is ‘fast-tracking’ solar and wind energy, eschewing coal. Official forecasts from the International Energy Agency predicts Chinese coal use will shrink 4% by 2026. CRU consultant Glen Kurokawa predicts it will shrink as soon as next year.
However, the opposite trend is being observed in developing economies, who are using more ‘to keep the lights on’. The trend is spurred by Asian nations, especially India, where the economy is growing at a rapid pace. Coal is a cheap and reliable source of power, especially highlighted during the 2022 energy crisis. Compared to natural gas, which without a pipeline must be superchilled into a liquid and loaded on expensive specialised ships, coal is convenient to transport. Climate concerns are beng overshadowed by those of energy security and profit. Coal exports, too, have been smashing records- reaching 1.5bn tonnes worldwide in 2023.
Another prominent feature has contributed to coal being an extremely stable and safe bet. Coal is exclusively used to provide ‘baseload’ power, referring to the type economies use to cruise at normal speed. According to the Economist, this suggests coal-fired plants are on almost indefinitely. Its limited use in industry and transport mean that it is less responsive to the economic cycle than other fuels.
Furthermore, Tom Price of Liberum, a bank, notes 80% of volume is sold through long-term supply contracts, thereby ensuring the bulk of demand is guaranteed. This is in sharp contrast to oil, copper, and other minerals and fuels, which traders typically buy on the spot market before hedging risk via buying derivatives. Most coal produced is also consumed domestically.
The Economist acknowledges ‘in time, demand may wane for good’. But certainly, that may not reduce the allure it provides to investors, considering supply is likely to fall faster. Excluding China, capital investment into coal mines and more has ‘cratered’. In the late 2000s, surging Chinese demand buoyed coal prices to $200/tonne, leading to waves of investment poured into capital. Today, prices skyrocketing to $400 have not done the same. Banks, too, don’t want to lend money for such endeavours and the process of acquiring new permits for mines is ‘hellish’. As such, coal supply may fall ‘sooner’ and ‘sharply’.
This could transform the coal market from a ‘sure-fire bet’ to a ‘riskier but potentially even more profitable proposition’, forcing price spikes and busts- highlighting the chance of hitting the jackpot. Already Chinese and Indonesian firms are ‘snapping up existing mines on the cheap’ to win big, according to consultancy Rystad Energy.
Author: Kendrick Low
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