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Saturday, May 25, 2024

What’s happening to the price of coal?

Article by Kevin Tutani

September 2022: $430, May 2023: $160

The price of coal has slumped by over 60% in just eight months, and has been retreating since then. The Australian Newcastle benchmark, dipped from over $400 per tonne, to $160, whilst the cheaper South African alternative, shrunk from $291, to $108, in the same time period. Since Australian coal is of a higher quality, it produces more energy, for any given quantity, and thus emits less carbon emissions. It is favoured in the global market and substituting it for other types is not common. All major exporters have witnessed a price slump, in the past 9 months. The windfall profits of 2022 have been shaved off. Various market participants, from producers, consumers and distributors, are keen to have a proper glimpse of what the future holds for this commodity. In order to deduce the fate of the industry, it’s important to grasp recent past events which led to sky-high prices and also, the drop. A review of the Zimbabwean coal industry is also offered, towards the end.

Quintessential industrial commodity

Coal is mainly used in power plants, which generate electricity, and for industrial purposes, such as the manufacturing of steel and cement. With regards power generation, some notable economies such as India, Pakistan and Vietnam, largely rely on it for provision of energy to households and industries. In the making of iron and steel, there is no other way to traditionally manufacture, without using coal as a raw material, and sometimes as an energy source. Therefore, for as long as people need steel, for example, in developing real-estate, and the manufacturing of vehicles, coal will be an important part of the world economy.

Endurance of the Chinese economy

China and India are the world’s largest consumers of coal. For instance, China consumes around 300 million tonnes of imports, annually, as per S&P Global, commodity insights,  April 2023. This excludes its own domestic production, which stands at 52% of the world’s total output. Since around 30% of economic activity in China, is linked to the real-estate sector, the demand for coal in power plants, cement and steel manufacturing, cannot be over emphasized. At the beginning of 2020, there was much rhetoric, and in some cases actions, towards divestment from fossil-fuels, around the world. Coal prices were slumping, global economic activity was weak and the future looked gloomy for the coal industry. The emergence of covid, and its impact on economies, was assumed to wield the power to decimate what still remained of the sector. However, global demand for coal retreated by a much smaller than expected 4%, by the end of 2020. The largest economy (China), had been resilient during covid. Nature also took its course in upholding world demand, as frigid weather in North-East Asia, at the time, resulted in a high demand for energy.  In the following year, economic recovery took a sterner upswing, worldwide. Coal miners had limited production capacity, and this served to push the price upwards. Additionally, in the first-half of 2021, China shut down more than 100 mines, for inspections and safety concerns, in the Shanxi province. The resultant tension between supply and demand fed into the rallying global prices. By October 2021, both metallurgical and thermal coal reached record-highs of around $240 per tonne, on the Australian benchmark, from $50, in August 2020. To add to the upward rally, towards the end of 2020, diplomatic and trade rows thickened, between China and Australia. As a result, in 2021, the former banned Australian coal imports, which had been 70.4 million tonnes, in the previous year. The shortage of coal in the Chinese market, and redirecting of Australian resources, aided fiery price hikes throughout the year. The Asian nation has been using Russia and Indonesia as its main sources of imports, ever since.

Counting the cost of war

Since the onset of the war in Ukraine, oil and gas supply chains have been affected. These essential commodities are imperative in power generation and household or industrial heating. The scarcity of natural gas, led to it being substituted with coal, especially in power-generation plants. Coal is the cheapest source of energy, and when the price or supply of alternatives are unfavourable, it provides an almost perfect substitute. Apart from scarcity of oil and gas, the war in Ukraine, resulted in an embargo on Russian coal by the EU. Russia is the world’s third-largest exporter, and traditionally supplied about half of Europe’s coal spending, annually. Ultimately, the EU had to rely on imports from South Africa, Colombia and other parts of the world for their energy needs. As for Russia, resources were rerouted to China, India and the Asia-Pacific. The rerouting of trade came with costs and ultimately pushed prices upwards. By August 2022, South African coal price had reached its highest point in history, and this was consistent with exporters from other regions as well. However, in Russia, the resource was sold at  discounts of around 50-60%, in order to make it more attractive to consumers. The nation maintains that profits were still being made, regardless of the deductions.

Global demand and the force of nature

Owing to the rapid recovery of the world economy, since the pandemic of 2020, demand for coal has been unrelenting. The global economy grew by 6%, in 2021, and 3.2%, in the following year.  With expansion in economic activity, came more energy requirements for production. The World Bank reports that there was an increase in overall coal consumption, globally, in 2022, with India, and Europe, registering a 10% and 5% growth, respectively. The record-high, global demand for that year, was also spurred by weaker performance of alternative forms of energy, such as hydro-electricity and nuclear, according to the World Bank’s, Commodities Markets Outlook, of October 2022. It is vital to note that, extremely windy or rainy weather, affect coal production and can lead to limited supplies. Thus the 2022, tropical cyclone season, in Australia, the second-largest global exporter, reduced supplies in the world market. As a result, some Asian consumers were largely unwilling to substitute the high quality Australian coal for cheaper alternatives from other regions. The inelastic demand for the high-quality Australian commodity, pushed the price upwards and created a huge spread between the Newcastle benchmark and other types of coal. However, because of the steep rise in Australian price, all grades from other regions also went upwards with it, albeit at more modest increases.

Redemption of market fundamentals

From record-high prices, the coal price is now in remission. As of January 2023, to date, the price  is receding, consistently. There seems to be a redemption of market fundamentals, which were compromised, in the past few years. Firstly, China has reopened the mines which were closed, for safety and inspection purposes, in the Shanxi province, in 2021. The province accounts for around 14% of the world’s total output. The resultant increase in supply, is aiding the flattening of the coal price curve.
Additionally, in as much as demand was increasing, global production also reached an all-time high in 2022. India and the U.S.A, grew production by 16% and 3%, respectively, for instance. Indonesia, the world’s largest exporter, went 4% above its annual production target, growing by 14%, and reaching an all-time high, despite the temporary export bans, by the government, at the beginning of the year (2022). The rerouting of coal exports has now been assimilated into the market. South Africa and Colombia are now replacing Russian exports for Europe, whilst Australia is using Japan, India and Korea as destinations, for its resources, after a diversion from China. Russia now supplies China, India and the Asia-Pacific. The switch came at a cost, which is now being managed better because of scale, experience and relatively more certainty in trade, than at the beginning of the diversions. Oil and gas prices are also ret reating, indicating that there will be more power-plants reverting to the use of oil and natural gas, for energy, instead of coal. For Russian exports, there was an eventual relaxation on the prohibition to ship Russian commodities, by the EU. Resultantly, Russian coal exports peaked to 5-year highs, adding to global supply. Forecasted drier weather conditions are also expected to influence stable growth as they reduce disruptions to production and distribution, adding to downward price pressures for 2023. News regarding performance of the Chinese economy, will also have an influence on overall prices. Any indication of lacklustre performance of the Asian state, will likely shove prices downwards.

Zimbabwe, in review

Although the country has failed to benefit from the windfalls of 2021 to 2022, there is still an opportunity to revive the sector. Currently, much of the nation’s coal production is dedicated to electricity generation, with a consumption of just over 2 million tonnes, annually. The main participants in the industry are Hwange Colliery and Makomo Resources, which went into corporate rescue in November,2021. The Zimbabwe Geological Survey, indicates that the country has high-grade coal deposits, although the size of reserves is a matter of contestation, as some reports understate the nation’s resources. Nevertheless, at the least estimates of 500 million tonnes (in reserves), at the current utilization rate, the nation can be sustained for more than 150 years. At the most, 8 billion tonnes in reserve estimates, signal that the deposits can be utilized for relentless economic growth. Reviving the sector, in the short-term, can considerably assimilate skills that may be emigrating from South Africa, at the end of June, upon the expiry of Zimbabwe Exemption Permits. The logistical task required to service an expansion of coal production for exports, is massive for both railway personnel and freight-truck drivers. Capital must not be the limiting factor, as a perfect pitch to investors can drive in its own funding. The nation needs to target beyond domestic consumption, so as to gain considerable returns from the commodity. Prices can be subsidized for domestic power-generation, in accordance with the status quo. However, export prices of around $100 per tonne (a huge difference from the $29 assigned to domestic players), will get miners into lucrative returns, which are best for sustainability of the industry. To be fair, it is a matter of superior discretion, if the nation sets a time frame of exploiting all domestic coal resources within only 50 years, whilst using the revenue earned, to diversify the economy. At the end of that period, it is reasonable to assume that climate-change activists and international laws, will eventually prevail over fossil fuels. Without a timely utilization of domestic coal resources, they may ultimately lie redundant. It is also important to note that, although coal prices have been receding, they are still above the 10 year average of $86, preceding the war in Ukraine.

Kevin Tutani is a political economy analyst- tutanikevin@gmail.com

Disclaimer: The views expressed in this article are those of the writer and do not necessarily represent those of the Zimbabwe Broadcasting Corporation.

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