How High Can the Price of Coal Still Go?

Ideally, we should be moving away from using coal to generate energy in exchange for cleaner, more renewable sources of energy. However, recent events have led to a significant increase in the demand for coal and caused an unprecedented increase in coal prices around the world.

Even though the Russia-Ukraine war has definitely contributed to the increased coal demand, coal prices were on the rise before Russia invaded Ukraine. For example, back in 2020 when the world was right in the thick of the COVID-19 pandemic, Australia called for investigations into the origins of the virus. In retaliation, China banned the import of all Australian goods, including coal, in late 2020 and turned to alternative suppliers to beef up its coal supply.

At that time, coal prices were on the decline, with BMO Capital Markets summarizing that the sector saw a record number of bankruptcies in 2020. As 2021 rolled in and countries started lifting lockdowns, there was a significant increase in power consumption in China and other countries.

However, a relatively tight market for liquified natural gas, coupled with weather conditions unsuitable for renewable energy generation, forced power plants around the world to turn to one of the most abundant and polluting fossil fuels: coal.

Data from the most recent BP Statistical Review of World Energy shows that by the end of 2020, demand for coal had eclipsed 2019 demand by 6%. With more than one-third of the world’s electricity production relying on coal, power plants quickly burned through a significant portion of coal supplies. Global coal supply was also impacted by severe flooding in Indonesia as well as flooding in Australia. All these factors contributed to the increase in coal prices even before the Ukraine-Russia war.

In the wake of Russia’s unprovoked invasion of Ukraine, bans on Russian oil by the European Union, as well as moves by Russia to cut natural gas exports to European nations, have inflated Newcastle coal prices to $400 per ton. Cut off from their usual natural gas supplies, several EU countries said they had no choice but to go back to coal.

This upped demand for a critical energy product that was already wracked with supply issues. The coal industry still hasn’t been able to completely solve the issues that hindered supply last year.

South Africa, the fifth-largest coal supplier in the world, is becoming an alternative to Russian coal. However, an underfunded and poorly performing rail network has capped South Africa’s exporting potential, said Toom Price, an analyst from Liberum.

Natural Coal Association executive director John Ward noted that the U.S. has been facing a crippling shortage of railroad workers, which has impacted the delivery of all products, including coal.

There has also been little investment in new coal mines, said financial services firm Jeffries Group, meaning we can expect supply issues and high prices to continue in the near term, to the benefit of companies such as Warrior Met Coal Inc. (NYSE: HCC).

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