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Coal Prices Could Reach $500 Due To Ukraine Crisis

WorldCoal Prices Could Reach $500 Due To Ukraine Crisis

World (Times Of Ocean)- Rystad Energy research indicates that coal prices are expected to pass $500 this year, up from $186 on the 23rd of February.

In Europe and elsewhere, the focus has been on how Russia’s war in Ukraine has affected oil, gas, and, more recently, nickel prices. But little has been said about the coal price shock that is likely to hit the region and spread like a tsunami around the world.

Europe’s largest supplier of thermal coal is Russia. According to Eurostat, Russia provided EU member states with 36 million tonnes of thermal coal last year, accounting for 70% of all thermal coal imports. While volumes have remained about the same, a decade ago Russian coal imports were a mere 35%.

For the past 10 years, the total power coal demand has declined, however, coal-fired power generators in Europe have become increasingly reliant on Russian coal, and Russia’s market share has increased significantly over time.

“There is simply an almost complete absence of surplus thermal coal available globally. Prices have shot past $400 and the $500 per tonne mark seems to be in play,” says Steve Hulton, VP of Coal at Rystad Energy.

Europe’s administrations may look to coal to pick up any shortfall in electricity generation as gas usage declines as gas prices continue to rise. However, coal consumers will struggle to find more coal from alternative producers because the supply/demand balance of international seaborne thermal coal is extremely tight.

How high could prices rise?

The sky is the limit if sanctions on coal trade with Russia occur or Russian rail/port transportation is disrupted. In both the Atlantic and Pacific markets, producers and traders report that buyers are already turning their backs on Russian coal. Further, the threat of additional demand and the lack of available supply are moving the market. In the last week, coal prices in both Europe and the Pacific skyrocketed. A physical trade of Newcastle FOB (6,000 kcal) coal was reported last week Wednesday at $400 per tonne, illustrating how tight and nervous the market is.

Imported coal is generally of better quality and cheaper than any domestic production as all the best coal in Europe was mined out years ago. Germany for example, once a coal mining powerhouse, no longer produces any bituminous coal or anthracite. The last couple of ‘hard’ or ‘black’ coal mines, were closed in 2018 following years of financial subsidies, which were necessary because of high production costs associated with the deep seams and difficult underground mining conditions. Large-scale surface mining of low-rank (low energy) lignite coal is still carried out, but imported coal is vital to meet the needs of the many thermal power plants designed to burn higher calorific value fuel.

Poland is Europe’s largest remaining coal producer and some 70% of total power generation is sourced from coal. Polish coal production rose slightly in 2021 with the country producing 52 million tonnes of lignite (brown coal), up 13% year-on-year, and 55 million tonnes of hard coal, up 1%. However, the long-term production trend is in decline and while Poland exports some thermal and coking coal to neighboring EU countries, it has also increased imports of high energy thermal coal from Russia as it is generally cheaper than local production from deep underground mines.

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One of the first places buyers will be calling will be suppliers from Colombia and South Africa.  Colombian coal production, which is nearly all exported, recovered in 2021 following a large fall in 2020 due to Covid-19 and a three-month-long industrial dispute at the large Cerrejon operation. Production rose to 59.6 million tonnes in 2021, up from 49.3 million tonnes the prior year but still well short of the almost 80 million tonnes it achieved previously. It is expected that production will increase again this year, potentially making an additional 10 million tonnes available for the export market, particularly as Glencore, now the full owner of Cerrejon, looks to take advantage of market conditions and rack-up value from the acquisition.

South African coal exports have been below planned levels for a number of years. Exports fell below 60 million tonnes last year, the lowest level in decades as the rail network was severely hampered by theft of copper cable. Annual exports of 70 to 75 million tonnes should be achievable if railway operator Transnet can sort out its security issues.

US coal production is currently seeing a resurgence after several years of decline, boosted by strong coal demand and robust prices, both domestically and overseas. Based on EIA figures reported to 3Q 2021, US thermal coal producers were on track to end up exporting approximately 36 million tonnes last year, a hefty 30% increase from 2020. Only around 5 million tonnes were destined for Europe as Asian markets again proved a popular and growing destination. With a lack of investment in new mining areas and a general avoidance of the sector by investors, several US mines have closed in recent years, which will hamper the ability to ramp up additional coal for a rampant European market, particularly when US power stations are paying high prices for domestic supply.

Source: Rystad Energy

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