U.S. markets close in 3 hours 13 minutes
  • S&P 500

    4,235.11
    -12.33 (-0.29%)
     
  • Dow 30

    34,227.20
    -252.40 (-0.73%)
     
  • Nasdaq

    14,120.14
    +50.72 (+0.36%)
     
  • Russell 2000

    2,330.81
    -5.00 (-0.21%)
     
  • Crude Oil

    71.24
    +0.33 (+0.47%)
     
  • Gold

    1,866.40
    -13.20 (-0.70%)
     
  • Silver

    28.08
    -0.07 (-0.25%)
     
  • EUR/USD

    1.2127
    +0.0021 (+0.17%)
     
  • 10-Yr Bond

    1.4960
    +0.0340 (+2.33%)
     
  • GBP/USD

    1.4120
    +0.0003 (+0.02%)
     
  • USD/JPY

    109.9880
    +0.3530 (+0.32%)
     
  • BTC-USD

    39,994.54
    +2,857.11 (+7.69%)
     
  • CMC Crypto 200

    999.71
    +30.86 (+3.19%)
     
  • FTSE 100

    7,146.68
    +12.62 (+0.18%)
     
  • Nikkei 225

    29,161.80
    +213.07 (+0.74%)
     

It’s Not Over Yet for Coal as Global Prices Surge on Hot Demand

  • Oops!
    Something went wrong.
    Please try again later.
·4 min read
  • Oops!
    Something went wrong.
    Please try again later.

(Bloomberg) -- Coal is seeing a dramatic spike in demand just as several major miners are hit with production problems, sparking a surge in prices from China to Europe.

Prices for the dirtiest fossil fuel are soaring as hot weather in North Asia raises air conditioning needs, adding to already strong demand due to the industrial recovery from the pandemic. Mine safety issues in China, heavy rainfall in Indonesia and disruptions in Colombia are constraining output.

The price spike comes amid an existential crisis for coal, with climate policies making it increasingly difficult to invest in new projects. The squeeze might not change that, but it’s providing miners with a windfall while it lasts.

“We could have strong prices into the fourth quarter,” said James Stevenson, lead researcher for coal, metals and mining at IHS Markit Ltd. in Houston. “But this isn’t structurally strong demand. You’re probably best optimized enjoying the higher revenue than investing it in new production.”

As is often the case with coal, the story begins in China, which mines and burns half the world’s supply. As the first major economy to rebound from Covid-19, factories there have been running hot for a while, and that’s recently been given an extra boost as the recovery takes off elsewhere. However, a spate of deadly mining accidents has spurred Beijing to crack down on unsafe practices.

The resulting drop in output has been exacerbated by rising electricity consumption amid a hotter-than-normal summer, which followed extreme cold last winter. Higher demand meant several provinces had to curtail power supply to factories in December, and more than 20 cities in southern China have done the same in the past few weeks.

Coal prices have also been aided by problems at least partially of Beijing’s own making. The government refuses to accept coal from Australia, once its No. 2 supplier, amid a geopolitical spat. China’s benchmark thermal coal futures hit a record last month and are more than 50% higher than they were a year ago. Futures dropped Friday, falling as much as 5.9%.

Indonesia, currently the No. 1 source of coal for Asia’s largest economy, has been hit by heavy rainfall. That’s seen total shipments drop about 15% below pre-virus levels, Morgan Stanley said in a note this week. Indonesian coal futures on the Singapore Exchange also rose to an all-time high in May.

The Cerrejon mine in Colombia has been hit by blockades of a rail line and port last month. The company said May 30 that it would be gradually reopening.

Even with China’s import ban, Australian coal futures are surging thanks to buying from Japan, South Korea and Taiwan. Spot prices for high-quality thermal coal in the port of Newcastle rose to the highest since 2011 on Monday.

Europe, U.S.

The spike is rippling out of Asia and across the globe. Northwest European coal are up around 20% this year and reached a two-year high on Tuesday.

European prices have rallied this year due to colder-than-usual weather on the continent and a drawdown in stockpiles at ports, said Matthew Boyle, head of coal and Asia power analytics at S&P Global Platts. “There have been disruptions with Colombian exports, which is a large supplier into Europe, whereas Russian coal has been diverted toward Asia,” he said.

The global boom is unlikely to benefit producers in the U.S., where the rise in prices has been more modest. American miners historically have been eager to export, but many aren’t in a position to take advantage of the surging prices. They’ve been scaling back as power generators buy less coal amid a shift to renewable, and have also been hit with labor shortages due to the pandemic.

U.S. production in the first quarter was down 6.9% from a year earlier, which means many of the big suppliers simply don’t have much tonnage available to ship overseas, said Andrew Cosgrove, a mining analyst with Bloomberg Intelligence. “These guys are not looking to ramp,” he said.

The question now is, how long will the global price rally last? Goldman Sachs Group Inc. raised its 2021 and 2022 forecasts for Newcastle coal this week on demand strength and the difficulty of permitting and building new mines in Australia. Morgan Stanley, on the other hand, expects a correction in the northern fall as it sees the market in surplus when supply begins to pick up.

Even with rising Chinese demand, IHS sees global consumption of seaborne thermal coal at least 55 million tons lower this year than in 2019 as major users like India battle the virus. While the market will be tight in the near term, there’s still ample capacity for later in 2021, Stevenson said. “This is a bad spike to invest into. Mid-term fundamentals are still bearish.”

(Updates Chinese futures price in 7th paragraph.)

More stories like this are available on bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2021 Bloomberg L.P.