Column: Coal’s rally thumps oil and gas, brings pain to Asian buyers

A man stands on a boat as coal barges queue to be pulled along Mahakam river in Samarinda, East Kalimantan province, Indonesia, August 31, 2019. REUTERS/Willy Kurniawan

LAUNCESTON, Australia, March 10 (Reuters) – The skyrocketing price of crude oil and natural gas in Europe in the wake of Russia’s invasion of Ukraine is grabbing the bulk of headlines, but their gains look modest compared to those of thermal coal.

While coal may be exiting the electricity sector in Europe and North America, it remains the most vital source of power generation for much of Asia.

Seaborne thermal coal prices have soared to record highs in recent sessions, with the market spooked by the potential loss of Russian cargoes, flood-related supply disruptions in Australia and the threat of another Indonesian export ban.

Futures linked to the Australian benchmark Newcastle index ended at $415 a tonne on Wednesday, down from the recent record high of $440 on March 2.

The contract has spiked 145% since the end of last year, with much of the gain coming since the Russian invasion of Ukraine on Feb. 24, with the price closing at $237.70 a tonne the day prior.

To put coal’s gain into perspective, benchmark Brent crude futures closed at $112.51 a barrel on Wednesday, up 45% from the end of last year, while Dutch natural gas ended at 148 euros per megawatt hour, a gain of 115% from the last trading day in 2021.

And it’s not just paper coal markets that are on fire, the gains have been matched by some physical trades as well, with globalCOAL reporting the sale of Newcastle coal for April at a premium of $38 a tonne to the index, and for June at a premium of $48.

South African coal, which can arbitrage between European and Asian destinations, saw a March cargo trade at a premium of $30 a tonne to the index price at the country’s Richards Bay port, according to globalCOAL.

While these prices look unsustainably high, it’s worth noting that relatively small volumes are transacted on a spot basis in the coal market.

Far more common are short- and medium-term contracts, with utilities in major seaborne buyers such as Japan and South Korea preferring to negotiate prices with miners well ahead of delivery times.

However, the surging price of spot coal will eventually be reflected in these types of contracts as well, leading to significant inflation in energy costs for countries that rely on imported fuel.

While cargoes currently being loaded and sailing will have been bought at prices well below the present level, it’s likely that from April onwards the market will have to bear the full extent of spike caused by the Ukraine crisis.

DEMAND DROP COMING?

As yet, there is little sign of major demand destruction, although price sensitive buyers such as India, the world’s second-biggest coal importer, are starting to see import volumes decline.

India brought in 7.33 million tonnes of thermal coal, used for power generation, in February, up slightly from 7.08 million in January, which was the weakest month since June 2020, according to data and analytics company Kpler.

India’s thermal coal imports are more usually in a range between 10 and 15 million tonnes a month, with Indonesia, South Africa and Australia the biggest suppliers.

China’s imports of thermal coal also weakened in the first two months of 2022, with Kpler showing volumes of 10.38 million tonnes in February and 10.11 million in January, down from 19.35 million in December.

Indonesia’s short-lived export ban in January would explain much of the decline in China’s imports, but Beijing has also been working hard to get domestic miners to ramp up production in order to secure energy supplies.

The question for Asia’s seaborne coal market is how quickly the current unprecedented prices will translate into demand destruction.

It’s very likely that buyers such as India, Bangladesh and Pakistan will avoid buying coal as their utilities will be massively loss-making if they paid the current price, or even half of what is right now.

Utilities in Japan and South Korea have less choice, given that the alternative of liquefied natural gas (LNG) is even more expensive on a spot basis, and the surge in crude prices will filter through to oil-linked contracts in coming months as well.

GRAPHIC-Prices of seaborne thermal coal: https://tmsnrt.rs/3tKJOqj

The opinions expressed here are those of the author, a columnist for Reuters.

Editing by Kim Coghill

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.