Coal’s Resurgence: Futures Rally to Fresh Record Highs

Miner holds coal. (Parilov/Adobe Stock)

This year, U.S. coal prices have staged a fierce comeback amid renewed global demand and supply cuts. As parts of Europe and Asia face a growing energy crisis, industry observers project that the fossil fuel’s gains could be extended into 2022, prompting more countries to increase production and shipments.

Coal futures on Oct. 5 surged to fresh record highs of $269.50 per metric ton, lifting their year-to-date gains above 200 percent. Across the globe, the black combustible sedimentary rock is soaring: European coal is trading at a 13-year high, Australian Newcastle coal rallied 230 percent, and Chinese thermal coal prices have hit new all-time highs.

While demand is intensifying worldwide, coal inventories are presently insufficient to satisfy consumption. The temporary panacea has been to boost output, support foreign shipments, and increase investments in coal power plants.

How the World is Responding

American utility companies have switched to coal in response to the immense electricity demand, but domestic miners have slashed their mining capacities by as much as 20 percent since 2015.

The Chinese government has substantially increased its coal usage, forcing the state to unleash reserves and import more from producing nations. Beijing recently released Australian coal from bonded shortage, despite a year-long import ban. Zhejiang Province stimulated coal imports from Kazakhstan and Africa. Chinese officials have eyed Colombia, Ecuador, and Venezuela as the country’s next energy trading partners because of their immense coal and crude oil supplies.

Aerial view of a modern large coal power plant in Dezhou City, Shandong Province, China in this undated photo. (chungking/Adobe Stock)

Beijing began ordering financial institutions to boost funding for companies that are ramping up output, while Chinese regulators plan to relax coal mine safety efforts as authorities want domestic firms to produce more of the energy commodity. Overall, Chinese Senior Vice Premier Han Zheng has required state-owned energy companies to gather as much fuel as possible ahead of winter.

A power crunch is expected to hit India as its coal stockpiles have reached a crisis point, leaving the emerging market with few options. According to the government, the nation’s 135 thermal power plants possessed an average of four days of coal supplies, down from 13 days of stocks in early August. As a result, officials are encouraging state-run Coal India to boost production to circumvent the supply squeeze.

The UK’s electricity system operator (ESO) has spent nearly $120 million to ensure the last remaining coal power stations are operational. These outlets are left on standby to generate electricity on short notice.

European power producers are turning to Russia for more coal to help mitigate the energy crunch expected this winter. Despite being the world’s sixth-largest coal producer, experts agree that Moscow could not export enormous amounts of coal on short notice, whether it is because Russian companies would be unprepared to meet Europe’s stringent environmental requirements or limited transportation capacity.

Problems With the Green Energy Transition

Despite United Nations Secretary-General António Guterres pushing governments and private companies to “end the deadly addiction to coal,” the commodity still accounts for more than one-third of global power generation. In recent years, the world has shifted away from coal in favor of renewable alternatives. However, as a growing number of advanced economies experience shortages and power outages, many have been questioning the global green energy transition.

“In energy management the term baseload is the permanent minimum load that a power system is required to produce in order to meet fundamental electricity demands by customers,” wrote Ole Hansen, the head of Commodity Strategy at Saxo Bank, in a research note. “In the past that baseload was provided by conventional power plants such as coal and nuclear plants, but with the green energy transformation in Europe, many of these conventional power plants have been shut down and replaced with renewable energy production, and with gas being the go-to fuel when production from renewables drop.”

Great Britain is coming off the least windy summers in 50 years. Germany has failed to create enough wind power as subsidies for old wind turbines have ended or the infrastructure is being dismantled amid wear and tear. Industry observers warn that it could take years for new turbines to go online. Beijing has conceded that it cannot depend on renewable sources right now.

“Because renewable energy (sources such as) wind and solar power are intermittent and unstable, we must rely on a stable power source,” said Su Wei, Deputy Secretary-General of the National Development and Reform Commission (NRDC), at a global leaders climate summit in April. “We have no other choice. For a period of time, we may need to use coal power as a point of flexible adjustment.”

The State of Coal in 2021–2022

Lucas Pipes, an analyst with B Riley Securities, stated that it would be challenging for North American and European markets to initiate gas-to-coal switching in a timely manner.

“Investors are underappreciating the structural changes that have taken place in the North American energy landscape that could lead to these higher prices persisting for some time. Chief among them, in our opinion, is a dramatically smaller coal generating and mine supply footprint, which limits gas-to-coal switching,” Pipes wrote in a research note. “Coal supply bottlenecks are already emerging. It is difficult for the industry to increase output by more than 10 percent from 2021 levels, limiting gas to coal switching.”

Coal producers are anticipated to expand capacity by 30 percent over the next several years to take advantage of these higher prices. In its latest Short-Term Energy Outlook (STEO) report, the Energy Information Administration (EIA) forecast that U.S. production would jump 7.8 percent in 2021 and 2.7 percent in 2022. The EIA also estimates that exports will advance by nearly one-quarter this year and 4.5 percent next year.

Ryan Driskell Tate, a Global Energy Monitor research analyst, warned that these investments could lead to as much as $91 billion in non-performing assets. Tate said that “new mines and expansions of existing mines will be producing coal for a world in which coal is unviable economically, and untenable for the environment.”