Evolving Energy Trade Patterns Cause Coal Prices to Decrease

Coal was the primary means of energy generation in numerous countries across the world for decades. It led to the development of technologies such as the steam engine and played a crucial role in the industrialization era.

However, research from the mid-1800s forward has revealed that activities such as burning coal are directly tied to increased CO2 concentrations in the atmosphere and climate change. This has led to a shift from dirty energy sources such as coal to clean and renewable energy for several countries as part of global efforts to tackle climate change.

Coal prices have suffered as a result, seeing a relative down trend that has been accompanied by increased investment in alternative energies, including solar and wind.

However, when a worldwide energy shortage and soaring energy prices forced several nations to seek alternative energy sources, countries such as India and China turned to coal, which caused prices to rise amid unprecedented high demand. Despite this surge in demand, coal prices have been trending downward in recent months. Benchmark prices for South African and Australian coal have dropped by close to 50% from their April and September 2022 peaks.

Coal production is directly tied to customer demand. As global demand for the energy source rose and finally peaked at all-time highs last year, India ramped up coal output by 16%, China increased coal production by 11%, and the United States upped its coal output by 3%. Indonesia increased production to 4% over its yearly target while South Africa saw its coal output drop to a 29-year low due to rail and labor constraints.

Although Russian coal exports were sanctioned by the European Union and nations such as the U.S. and Canada in the wake of its invasion of Ukraine, the supply deficit was covered by increased exports from South Africa and Colombia. Indonesia also increased its coal exports in 2022 by 14% to all-time high levels to make up for the supply crunch caused by the exit of Russian exports.

Coal prices are expected to decline in 2023 while staying over their five-year average based on reduced demand. In the U.S., for instance, coal consumption in the last quarter of 2022 reduced by 8% thanks to lower natural gas price increases.

Experts also predict a drop in coal futures prices this year compared to 2022 alongside medium-term reductions in coal demand and prices. Future trade diversions that raise gas prices and increase transportation costs could potentially halt the decline in coal prices.

While the changing market dynamics are leading to a reduction in the global prices of coal, they in no way suggest that miners such as Alliance Global Partners L.P. (NASDAQ: ARLP) should close shop any time soon since demand for coal still exists.

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