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Commodities Corner: Coal’s not dead, and won’t be for years to come

Coal may be losing market share as a major energy source in some parts of the world, but the death knell for the industry hasn’t sounded yet, and might not for decades.

Thermal coal MTFC00, which is used for power generation, is a “declining commodity,” admits James Stevenson, the research lead for coal, metals, and mining at IHS Markit. He notes that in the U.S., coal demand is about half what it was over a decade ago.

In the Asia-Pacific region, however, coal demand had been growing until very recently, and has now “plateaued.” IHS Markit expects “a little less coal will be consumed” with each passing year, he says, while demand in the U.S. may fall “very dramatically” over the next 10 years.

Even so, prices for coal have been strong. Northwest European thermal coal prices, as assessed by IHS Markit, averaged around $168 per metric ton in January, versus an average of around $50 in 2020 and $119 in 2021. The strength was partly due to a coal export ban Indonesia, which has since been lifted.

The coal market is “not dying,” says John Kartsonas, the managing partner of Breakwave Advisors. Coal demand is “shifting from the Western world to the Eastern world,” based on price and availability. “Coal is here to stay for many years to come.”

Coal-fired power generation from 2021 to 2024 is forecast to increase by 4.1% in China, 11% in India, and 12% in Southeast Asia, but is likely to tumble by 21% in the U.S. and 30% in the European Union, according to the International Energy Agency’s Coal 2021 report issued in December.

“With the rush for readily available energy this year around the world, coal was the only alternative,” says Kartsonas, who’s also a partner of the Breakwave Dry Bulk Shipping exchange-traded fund BDRY. In particular, a supply shortage and price spike for natural gas contributed to the energy crisis in Europe. It was “inevitable” that coal prices would rally to meet the broader cost of energy, given limited supply and booming demand, says Kartsonas.

Benchmark European thermal-coal prices climbed by nearly 26% between Dec. 28 and Jan. 30, according to S&P Global Platts. Even so, coal prices are cheaper than spot natural-gas NGH22 and oil CLH22 BRNJ22 prices, says Matthew Boyle, manager of global coal and Asia power analytics at S&P Global Platts. So, it’s still “profitable for power utilities to burn coal.”

Demand spikes for coal in 2021 prompted Indonesia and Russia to divert domestic output into the export market, says Boyle. Indonesian exports hit their second-highest level ever last year, hurting the domestic market and leading to a January ban on coal exports, he says.

Global coal-fired power generation was set to reach an all-time high in 2021, according to the IEA. The agency’s executive director, Fatih Birol, referred to that historical high as a “worrying sign of how far off track the world is in its efforts to put emissions into decline toward net zero.”

IHS Markit’s Stevenson, meanwhile, says coal is likely to remain a big power source until at least 2050.

The true death knell for coal in energy generation may come when there are a large number of utility-style batteries capable of putting out as much power as a small power plant, as well as ample raw materials to make them, he says. That would allow power generated from renewable sources, such as wind or solar, to be stored for later use.

That hasn’t happened yet, and coal prices are likely to stay high well into the second quarter of this year and possibly longer, says Stevenson, with demand expected to be higher this year than last year.

Read: Goldman Sachs becomes first major U.S. bank to stop funding Arctic drilling, pulls back on coal

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