After oil, coal prices move up on supply squeeze, record demand

All major benchmarks for thermal coal – the world’s second most important energy fuel after crude oil – have pushed back above $50 a tonne for the first time this year, driven by output cuts, supply disruptions and increased demand.

After years of declines, tightening fundamentals have been supported by a surge in oil prices and a weakening dollar, while storms in some producing regions and hot weather in Asia have exacerbated price movements.

“Nothing suggested to me that we were about to experience such a push,” said Georgi Slavov, global head of energy, ferrous metals and shipping research at commodity brokerage Marex Spectron.

Rising prices

European coal futures have risen over 8.5 per cent already this month to near one-year highs of $54 per tonne, and the market is more than 50 per cent above its February 13-year lows.

Physical coal prices have also gained, with cargoes from Australia’s Newcastle port adding nearly $4 since mid-May, to $54.25 a tonne, while shipments from South Africa’s Richards Bay terminal have risen $6 since late May to $56.60 a tonne.

Coal shipments for delivery into Europe’s ports of Amsterdam, Rotterdam and Antwerp (ARA) have risen from under $47 in late May to $50.55 a tonne.

Dip in output

Following years of falling prices, with coal futures tumbling over 80 per cent between 2008 and 2016, producers have cut back investment into new capacity and closed down unprofitable mines.

“Production has been declining for a year which is helping the market to rebalance,” said Slavov.

Generally declining output has been met by surprise events that further pushed up prices, including storms and floods around production hubs like Australia, Indonesia and Colombia, said Slavov.

At the same time, demand has been strong in India as utilities re-stock ahead of the imminent monsoon season and record heat drives up the use of air conditioners in homes, offices and public buildings.

Global demand

In Europe, coal demand has been pushed up by relatively good power generation margins as well as unusually low wind power generation since the beginning of the year.

Finally, oil prices virtually doubled, while the weakening dollar makes imports of fuels such as oil and coal, which are traded in US dollars, cheaper for countries using other currencies at home, spurring demand.

The higher prices, coupled with extremely low prices for dry-bulk freight, have also opened up unusual trade routes, such as exporting Colombian coal to South Korea and Japan in a voyage that can last two months.

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