Australia
China
India
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Japan
Malaysia
Philippines
Singapore
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Taiwan
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Vietnam
Germany
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USA
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Singapore
United Kingdom
Global energy supply chains have run astray due to Russia’s invasion of Ukraine, and a worsening shortage of coal is threatening a power crisis in Asia in addition to rising inflation. Asia coal prices hit a record high last month and countries around the globe are rushing to secure coal shipments to replace the declining natural gas supply.
Newcastle coal futures, the benchmark index for the top consuming region Asia, rallied as high as $430 a ton in late May, and are expected to face upwards price pressure in the near term until the duration of the conflict in Eastern Europe. While a tight supply has exacerbated coal prices, countries are stepping up efforts to diversify their energy sources. Spot physical coal at Australia’s Newcastle port hit a record $402.50 a ton on Friday, the first time the spot index rallied above $400.
Asia’s coal buyers
Coal’s spurring demand has brought focus on a commodity that was on the way to being phased out for cleaner sources of energy. Increasing demand from around the globe has put upward pressure on a commodity having limited supply, risking blackouts in Asia.
While the world is moving towards green and sustainable sources of energy, Asia is largely dependent on coal-fired power plants. Coal was on the decline until the beginning of the pandemic, but the crisis has driven the usage of coal higher, particularly in China. Asia is the frontrunner in the usage of coal for power generation as well as expansion of coal-fired power generation, with 76% of global coal capacity and 94% of new coal capacity in the world, a United Nations report said in 2021.
China is the biggest producer of coal, with over 50% of global coal production, while also being the biggest importer of the commodity in the world. The country is staring at blackouts in the coming months even as the coal production capacity has drastically increased. China relies on coal for 60% of its electric supply, and a supply crunch in 2021 had caused week-long power cuts that hit the country’s manufacturing sector. Beijing has imposed a price cap on coal which has caused some mines to prioritize quantity over quality, leading to buyers demanding more coal.
Beijing had placed a ban on buying high-quality coal from Australian miners and has increased purchases from low-grade coal suppliers in Indonesia and Mongolia. Asia coal prices have seen an uptick as European buyers are also picking high-grade coal supplies from Indonesia and other countries, in a bid to replace the Russian coal and gas supplies.
“Prices between high- and low-grade thermal coal in Asia-Pacific (APAC) have diverged since late March 2022, but Fitch Ratings expects the gap to narrow over time,” Fitch said in a recent note. “Prices of high-grade coal have been boosted by tight supply and geopolitical intensions, while prices of low-grade coal are constrained by weak demand from China.”
Coal traders have said that the lockdowns in China had masked the problem of low-quality coal in the country, but as the economy reopens and restrictions are lifted, power consumption is expected to rise substantially. Unusually high temperatures this summer may also push up the demand for electricity.
Additionally, a shortage of coal and rising prices may have a negative impact on the profits of China’s steel industry.
India’s protracted power crisis
After China, India is the biggest importer of coal in the world, and the rising prices have eroded import volumes and reduced stockpiles necessary for power plants. This comes soon after a heat wave across the county caused an unprecedented demand for electricity. India generates more than 75% of its electricity from coal. S&P Global Commodity Insights in a report says India is grappling with a “severe and protracted” power crisis after a sustained surge in global coal prices in late 2021, further aggravated by the war in Ukraine.
India’s state-run coal miner Coal India has denied renewal of coal contracts with sponge iron producers to prioritize power plants. As contracts expire, iron producers in the country will be forced to rely on the expensive imported coal. The country’s domestic coal is subsidized, whereas record high prices of imported coal have stoked concerns among industrial consumers.
Coal research and analysis firm CoalMint in a report said that India’s non-coking coal demand in FY23 is expected to reach 1.001 billion tonnes, up from an average annual demand of 900-950 million tonnes.
Asia coal demand and sustainability
Meanwhile, Japan last week said it will stop providing yuan loans to construct coal-fired electricity plants in Indonesia and Bangladesh. The decision comes after G-7 nations agreed to end any new form of aid for coal-burning power stations.
Japan ranks 6th in the world for coal consumption and used the commodity to produce over 30% of its electricity. The country has pledged to phase out coal for power production by 2030 but has kept coal-fired power plants active since it shut down several nuclear power plants after the Fukushima disaster.
Southeast Asia is also vulnerable as economies in the region have doubled in size since 2000, and the power needs have increased drastically. “Power generation in the region has almost tripled in the past two decades to keep pace with economic growth, with the largest increase coming from coal-fired power plants,” said a report by International Energy Agency (IEA).
Australian coal side-lined
On the other hand, Australia has seen its coal prices remain subdued as Asian buyers prefer Russian coal offered at a discount. “Plus, Indonesian mid-CV is available, cheaper Russian material is setting the mark for coal in Asia; that is also impacting prices,” an Indonesia-based trader told S&P Global. Buyers in India, Thailand, Vietnam and South Korea were procuring coal from Russia and market participants expect these imports to rise.
