Raw material updates
Sign up for myFT Daily Digest to be the first to know about commodity news.
Supply disruptions, drought in China and rebounding demand for electricity have boosted the thermal coal market, making the world’s least-valued commodity one of this year’s best-performing assets.
Since the start of the year, the price of Australian high-energy coal – the benchmark for the vast Asian market – has climbed 80% to nearly $ 146 per tonne, its highest level in more than a decade.
Its South African counterpart is also trading at its highest level in more than 10 years, rising 44% in 2021, according to the latest weekly assessment from commodity price supplier Argus.
This puts the coal benchmarks ahead of two of the best performing asset classes this year: real estate, which is up 28%, and financials, up 25%. Only Brent crude, up 44%, posted comparable gains.
The resurgence of thermal coal, which is burned in power plants to generate electricity, highlights the difficulties faced by governments in trying to switch to cleaner forms of energy.
Even though renewables such as wind and solar are growing rapidly, they are struggling to keep pace with growing demand for electricity and electricity, leaving fossil fuels to fill the void.
Several related factors are driving prices up, according to traders and analysts.
“The price increases were mainly due to strong demand from China, with Chinese buyers ready to get materials at the highest prices,” said Dmitry Popov, senior thermal coal analyst at CRU, a consultancy firm. .
A drought earlier this year in southern China, which destroyed hydroelectric dams and boosted demand for coal, played a significant role in the product’s turbocharger cycle.
China has also struggled to boost domestic supply to meet increased demand due to strict security rules that have reduced production volumes.
At the same time, production from Indonesia, China’s largest overseas coal supplier, was hampered by persistent rainfall, while rail and port constraints affected shipments from Russia and South Africa, two other essential charcoal producers.
China has been unable to buy Australian coal due to a ban, while soaring natural gas prices have prompted some utility companies in Japan and Europe to switch to coal, tightening further the market.
“I’ve never seen China come under this kind of pressure before,” said Tom Price, head of commodities strategy at Liberum. “Broken hydro, struggling local production, and key import options are simply missing.”
All of this happened as demand for electricity increased with the easing of lockdowns linked to Covid.
After falling by around 1% in 2020, global demand for electricity is expected to grow by nearly 5% in 2021 and 4% in 2022, according to the International Energy Agency.
“While renewable energy sources are expected to continue to grow rapidly, they will only be able to meet about half of the increase in net demand in 2021 and 2022,” the IEA said in its latest report on the electricity market.
As a result, the Paris-based agency expects coal-fired power generation to increase by nearly 5% this year to exceed pre-pandemic levels, and an additional 3% in 2022, as of today. which it could reach an all time high.
But not everyone thinks the high prices will hold up. Fitch Solutions predicted prices would peak this year as Beijing frees coal from strategic stocks and orders miners to increase production. In addition, fossil energy production in China generally peaks in July and August before falling sharply.
“Therefore, we continue to expect a slowdown in domestic demand for thermal coal by early September,” Popov said.
Further down the line, the big question for thermal coal is whether environmental policies will weaken demand faster than supply, with banks and insurers refusing to finance new projects.
“I expect supply to drop faster than demand,” said Price at Liberum, who believes China and India will continue to buy coal in the export market over the course of the year. next decade. “It’s a very tight market. It’s not going to crash into a pile.
Energy is the world’s essential business and Energy Source is its newsletter. Every Tuesday and Thursday, straight to your inbox, Energy Source brings you essential information, cutting-edge analysis and insider intelligence. Register here.