Coal price revival: how long can it last?

September 26, 2022

Montana Economy

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“If a year ago, fifteen months ago, you told people that thermal coal could cost $440 and coking coal could cost $600, they would call the ambulance and recommend a good doctor” , Neil Bristow, Managing Director of H&W Worldwide. Consulting, said Thursday at a recent Coal Association of Canada conference.

“Who would believe it?

While Russia’s invasion of Ukraine rattled energy markets and drove up coal prices, the reality is that thermal coal prices had surged months before the invasion, as Europe was already in self-induced energy shortage and resorted to coal.

Five or six years ago, thermal coal was selling for $60 to $80 a ton, Bristow said. Even before Russia invaded Ukraine, thermal coal prices had soared to around $200 a ton.

“The fundamentals that drove these prices higher in the third and fourth quarters of 2021 are still there, and they were only exacerbated by the Russian coal sanctions,” said Ernie Thrasher, CEO of Xcoal Energy and Resources.

Never in Bristow’s lifetime had he seen thermal coal (burned to generate electricity) worth more than metallurgical coal, which is used to make steel, but now it does.

Metallurgical coal (also known as coking coal or steelmaking coal) briefly hit $600 a ton, Bristow said, but has since stabilized at around $270 a ton. That’s still a high price, but less than thermal coal right now, which is well over $300 a ton.

The usual market forces of supply and demand that would normally see producers respond to high prices with increased production simply do not occur with coal.

In the United States, the coal mining industry is half the size it was a few decades ago and simply cannot suddenly reverse. Australian coal production peaked in 2016 and it seems unlikely that it can either meet the sudden demand for thermal coal. British Columbia is a major producer and exporter of metallurgical coal, but Canada exports little or no thermal coal.

Xcoal estimates that the UK and Europe alone will have to find 47 million tonnes of coal that came from Russia. It is unlikely to come from the United States

“There’s just not much the United States can do,” Thrasher said. “We have basically dismembered our coal industry.”

Even if US coal mines could increase production, coal terminal capacity for exports is limited, so coal produced in Montana and Wyoming is shipped through BC export terminals. And right now, one of those terminals – Westshore – has been paralyzed by a strike.

“There just isn’t the elasticity in the supply chain for people to react to these prices, and the old adage that the best thing for high prices is high prices is not true. “, said Thrasher.

In total, Xcoal estimates the global coal supply shortfall at 96 million tonnes.

“These high coal prices are happening at a time when the Chinese economy is just flat on its back,” Thrasher added. If the Chinese economy were to suddenly recover and grow, it would put even more pressure on thermal and coking coal prices.

“Who can supply 96 million tonnes to fill this void? Thrasher wondered. “There’s probably only China and India. There just aren’t many other countries in the world where there is the capacity to produce the coal needed to fill that void.

As for steelmaking coal, BC’s second most valuable export, a global recession could cool demand and temper prices somewhat. But Bristow predicts prices will remain high for the next few years because there simply aren’t enough new metallurgical coal mines being built.

“My models don’t show enough coking coal to meet global demand after about 2027, 2028,” Bristow said. “We desperately need new mines.”

“I’m going to be bold and say it won’t stay at $400 or $500 a ton for very long,” Thrasher said of coking coal prices. “But I think the days of seeing less than $125, $150 per metric ton of coking coal over any period of time are in the rearview mirror, and that’s because coal isn’t everything. simply not produced.”

Thrasher said he could see stagflation resulting from the coal shortage, if there was a global recession.

“If we go into a major global economic downturn, that’s definitely going to put a damper on our products,” Thrasher said. “The question is, if you go back and look at these supply shortages, will a 5% global economic slowdown be enough to solve the problem if you are short of 10% energy supply? You basically have a stagflation environment where the global economy is collapsing, but you still need energy and energy prices remain high.

“It will affect thermal more than coking coal. It could be something we haven’t seen in 40 or 50 years.

(This article first appeared in Business in Vancouver)