The shortage in coal supplies is leading to record high prices of fuel and dissuading the global economy from depending upon one of its most critical as well as polluting energy sources.
The post-pandemic surge in demand to supply-chain constraints and ambitious goals set to reduce carbon emissions are all contributors to the current power crunch all across the globe. As a result, projections of a harsh winter with fuel shortages are fueling concerns in the global economy.
Blunt Reminder
Australia’s Newcastle thermal coal, a global benchmark, is trading at the price of $202 a metric ton, which is three times higher compared to the end of 2019. Global production of coal, responsible for around 40% of the world’s electricity generation is nearly 5% lower than the pre-pandemic levels.
In Europe, the mounting prices for coal as well as other energy resources have had a negative impact on factory output and pushed household electricity bills higher. Key coal importers in Asia, including Japan and South Korea, are elbowing to secure supplies.
In China, diminishing supplies and heaving costs have caused electricity shortages on a scale unseen in over a decade, striking the industry and forcing some cities to turn off traffic lights in order to conserve power.
It is a blunt reminder of the heavy dependence of most parts of the world on coal just a few weeks before the commencement of the United Nations climate summit in Glasgow intended to accelerate the switch from fossil fuels to renewable sources.
China is the second-largest economy in the world as well as the biggest coal consumer. The country is faced with the worst power crunch as it tries to meet its climate targets. Beijing let its coal inventories dwindle while trying to reach its climate goals. In addition to that, it ceased imports of Australian coal due to a diplomatic row.
The country is now venturing into Latin America, Europe, and Africa in its quest for alternative suppliers. Australia on the other hand is trying to lure new buyers for its coal. The repercussions of China’s decision to halt coal imports from Australia have resulted in redrawing coal supply chains in the international community.
Coal supply is unable to keep up with the demand driven by the post-pandemic economic recovery globally. Last year production saw a slump of around 5% compared to 2019. As per coal producers, ramping up production will take time. They explain that it can take nine months to contract new mining trucks and even longer for the installation of new equipment at mines.
Chairman of the Philippines’s biggest producer, Semirara Mining & Power Corp. Isidro Consunji said, “We are maxed out in terms of capacity. The price of coal has gone up four times in the last year. I think nobody in the world expected a situation like that.”
The world’s dependance on coal has fluctuated with economic growth instead of the governments’ ambitious climate goals according to analysts. Global coal consumption dropped last year during COVID-19 but is projected to either meet or exceed pre-pandemic levels this year.
Analyst at energy researcher Wood Mackenzie, Rory Simington said, “When economic growth gets crunched, coal demand slows and everyone thinks we’re transitioning away from coal, but as soon as growth comes back, coal use accelerates again. There’s a difference between what people perceive happening in energy transition, and what’s actually happening.”
As countries took steps to hit their emission targets, they halted production of the fuel which contributed to the coal shortage globally. Spain, for example, shut down half of its coal production during 2020 and swore to phase out all its coal-fired power plants by 2030.
Paris-based International Energy Agency reported, that the turmoil in the sector encompasses a decades-long transformation in coal trade patterns, marked by “a shift to Asia and the waning of Europe in international coal markets”.
Asian Markets
Asia’s rise is contributing to price hikes. For Asian economies, the unexpected availability of Australian supply has been a godsend. According to official data figures, as China dropped coal stockpiles in early 2020, demand for Australian coal increased in South Korea by 56% during the first half of 2021 and by 65% in Japan.
Numerous Chinese cities have experienced electricity cuts in recent days due to coal shortage as well as the push to achieve strict emissions targets.
Nevertheless, Australian exports are not likely to fill the gap between mounting global demand, the scramble to stock coal for winter, and bottleneck-saddled supply. Analysts forecast that coal exports this year will rise about 2.5% this year compared to 2020, but demand will likely rise at almost twice that pace.
India doubled year-over-year its July imports of Australian metallurgical coal, but its supply remains running short.
In Japan, a Nippon Steel Corp. spokesman said it has been ramping up purchases of Australian coking coal during this year as demand for steel bounced back owing to economic recovery after COVID-19.
Asian suppliers have stepped in to substitute Australia’s China-bound volumes. Filipino producer Semirara said its average coal sales price increased by 49% during the first half this year owing to higher Chinese demand. The company has been trying to multiply its capacity to match higher demand.
China’s attempts at hunting for new buyers have not been smooth. As Beijing’s tiff with Canberra deepened, the country tried to lock in purchases of Indonesian coal, most of which are low grades increasingly avoided by global markets. However, bouts of heavy rainfall disturbed the supply.
Colombia and Kazakhstan have benefitted from the situation as their exports of Colombian steam coal to China almost doubled from a year prior to 2.8 million metric tons.
