As the global energy supply crisis persists, coal prices are skyrocketing and worldwide coal consumption is anticipated to return to record levels last achieved over ten years ago.
As markets and governments scurry to stock up on traditional energy supply amid delays brought on, analysts claim that limitations on carbon emissions are taking a backseat while investors in coal equities are enjoying a field day as a result of high coal prices.
Worse yet, the supply of coal has become even more scarce, Shaw & Partners senior analyst Peter O’Connor said on Friday’s episode of “Squawk Box Asia” on CNBC.
“Who would have thought dirty ol’ coal would have been the best-performing equities in the last financial year. So far this financial year it’s also the best-performing sector,” O’Connor said. “And looking at the year ahead through the northern winter with gas prices in Europe and gas supply availability, countries are turning back to coal.”
“And supply [of coal] is tight. Why? Because nobody’s building capacity and markets will remain tight given the weather and Covid. So that market will stay higher for longer, probably well into 2023 calendar year.”
Since the end of last year, the cost of thermal coal—used to produce electricity—has increased by nearly 170 percent.
Coking coal, a key element in steel production, is the second main coal sold, and it is trading lower. Due to many dynamics, China’s economy is growing more slowly than expected, which is reducing demand for coking coal and, as a result, steel output.
The International Energy Agency issued a new analysis on Wednesday warning that, if the Chinese economy recovers as anticipated in the second half of the year, worldwide coal consumption is forecast to climb by 0.7 percent in 2022 to match the record established in 2013.
According to the IEA’s Coal Market Update, “The global total would match the annual record set in 2013, and coal demand is likely to increase further next year to a new all-time high.”
“That sharp rise contributed significantly to the largest ever annual increase in global energy-related CO2 emissions in absolute terms, putting them at their highest level in history,” the IEA said.
When the world economy bounced back from the initial blow of the Covid epidemic in 2021, the global consumption of coal had already increased by around 6%, according to the IEA.
The European Union is trying to lessen its reliance on Russian gas, but is stopping short of imposing a gas ban, and Russia is responding by restricting supply to the continent. This is what is driving the continued rise in demand for coal.
According to the IEA, this will result in an additional 7 percent growth in coal consumption in the EU in 2022 over the previous year’s 14 percent increase.
“This is being driven by demand from the electricity sector where coal is increasingly being used to replace gas, which is in short supply and has experienced huge price spikes following Russia’s invasion of Ukraine,” it said.
“Several EU countries are extending the life of coal plants scheduled for closure, reopening closed plants or raising caps on their operating hours to reduce gas consumption.”
At the same time, the agency reported that boycotts of Russian coal put additional upward pressure on coal prices.
“Europe’s worst fears materialised this week after Russia cut flows via the Nord Stream pipeline to 20% of capacity. Gas inventories may not reach levels high enough to get through the winter,” Daniel Hynes and Soni Kumari, analysts at ANZ Research, stated in a note on Friday.
“As Europe’s spare import capacity is limited, it is likely to compete aggressively for LNG shipments.”
The pain is being felt by the whole gas market, particularly Asia-Pacific.
According to Bloomberg, Japan’s Nippon Steel Corporation signed a contract for the delivery of thermal coal on Wednesday with mining and trading behemoth Glencore for $375 per tonne, the highest price a Japanese company has ever paid.
All things considered, rising energy prices continue to contribute to global inflation, which compels central banks to tighten monetary policy.
The Federal Reserve increased its benchmark interest rates on Wednesday by 75 basis points, the most recent in a string of increases aimed at containing inflation.
