(Montel) A shortage of thermal coal this winter could yet see prices breach USD 200/t – a record high last seen in 2008, Engie Energyscan analysts said in a note on Tuesday.
Energyscan highlighted a combination of supply and demand pressures heading into the peak consumption season that risked extending this year’s rally in both basins.
Inventories in key regions including China, India, Europe and the US were at multi-year lows on the back of a strong recovery in power demand.
Demand has surged thanks to Asian economic recovery, as well as record high costs for gas and carbon in Europe that had priced more coal back into power generation, said Energyscan.
Its analysts noted a 41% year-on-year rise in coal-fired generation so far in 2021 across France, Germany, the Netherlands, Italy, Spain and the UK.
German coal-fired generation had jumped to a EUR 20/MWh advantage over gas-fired competition by September, reversing a slight advantage enjoyed by gas up until summer, according to Energyscan estimates of lower efficiency coal and gas plants.
“Despite record high CO2 prices in Europe, coal-fired power plants are running baseload in several countries as they are largely more competitive than gas-fired ones for spot and short-term delivery, a situation likely to remain relevant this winter with rising gas demand for heating purposes.”
Chinese restocking needs
A similarly tight situation was unfolding in China, the world’s largest coal user responsible for more than half global consumption.
Chinese thermal power demand – overwhelmingly met with coal – was up 15% year on year over the first seven months of 2021 even as the country’s own coal production has weakened since June to begin falling below the output of the past two years amid regulatory mine closures.
This has opened a gaping need to restock, with Chinese total coal inventories of around 100m tonnes standing at their lowest level in at least five years and less than half where they were in the pre-pandemic year of 2019.
“In the short term, restocking activity at Chinese coal plants is likely to provide support to the Pacific seaborne market,” Energyscan said.
“The USD 200/t mark could be hit for spot coal prices in both basins in case of further unplanned constraints on the supply side.”
Global seaborne suppliers have struggled to meet import needs due to a combination of poor investment in new production, Covid disruptions to workforces as well as unfavourable weather conditions in major producers like Indonesia and Australia.
China’s ban on Australian coal has additionally reshuffled typical supply routes, adding to congestion and freight costs in a shipping market already stressed by rebounding demand for other commodities.
“Looking at the forward curve, we can see that this tightness is spreading through 2022 maturities on the back of growing reluctance from Western banks to finance coal upstream assets,” said the report.
The main downside risks to coal this winter would likely come from a retreat in gas prices – via an increase in Russian gas exports to Europe – or from a significant improvement in Chinese supply, it added.