Thermal coal, the least loved major commodity, has jumped to its highest level since late 2016 as strong manufacturing activity in Asia and appetite from China drives demand.
Thermal coal is burnt to generate electricity, and is a big source of income for miners such as Glencore, Whitehaven and Yancoal, which produce material for the seaborne market. While the fossil fuel is being phased out in Europe on environmental grounds, it still accounts for about 40 per cent of energy consumption in emerging markets.
Its fortunes are therefore closely tied to manufacturing activity and the global economy, which most forecasters believe is enjoying the strongest period of expansion since the financial crisis. Indeed, coal-fired power generation rose in most of Asia’s major economies last year, boosting demand, according to BMO Capital Markets.
“Thermal coal — once again it is powering Asian growth and urbanisation,” said Glencore’s chief executive Ivan Glasenberg. “It’s another commodity where there’s been under-investment over the years.”
Australian coal with an energy content of 6,000 kcal/kg — benchmark for the vast Asia market — is trading at $103 a tonne, according to a price assessment from Argus Media. Six months ago it was just above $80 a tonne.
On the supply side, big new thermal coal mines are not in the works and projects are becoming more difficult to finance as banks and investors fret about their environmental credentials. This has helped tighten the market and drive up prices.
Of the new tonnes that are entering the market, traders say much of this is lower quality material from Indonesia that does not have a high calorific value and is not favoured by big utility companies in Asia. As well as the strength of the Asia industrial cycle, other factors have helped boost thermal coal prices across the region, analysts say.
China is allowing more coal-fired power generation this winter because of gas shortages and has loosened import restrictions. Domestic production in India has yet to pick up meaningfully, forcing it to buy from overseas and there is heavy congestion at ports in Australia, one of the world’s biggest suppliers.
“Supply is still very tight, probably not going to catch up with demand easily in January and February,” said Shirley Zhang, principal analyst at Wood Mackenzie.
Traders reckon thermal coal could remain about $100 a tonne ahead of the annual contract negotiations between Japanese utility companies and Australian producers, which are usually led by Tohoku Electric Power and Glencore respectively.
The April-March contracts historically accounted for up to half of Japan’s annual thermal coal imports. While that figure has fallen they are still used as a benchmark across the region by other consumers.
Japanese power utilities typically pay a premium to secure supplies from Australia on long-term contracts because the coal works well in their boilers and meets environmental controls.
Last year the contracts were settled at $85 when the prevailing price was roughly $77. A price of $90 this year would deliver a big windfall for Glencore, which produces coal at $48 a tonne.
Over the long-term, analysts say coal faces significant headwinds, not least in China where the government wants to replace coal-fired boilers and more widely the huge falls in the cost of renewable energy.