The year 2022 has been a topsy-turvy one for the commodities market, especially coal. The war between Russia-Ukraine led to sanctions and supply concerns across the globe propelled thermal coal prices to an all-time high.
However, eight months down the line, the war still continues. However, the panic has subsided, trade dynamics have changed, and coal prices have cooled down. While the popular South African and Australian 5500 kcal/kg NAR grade coal prices have come down 40%, Indonesian 5800 kcal/kg GAR coal prices are down 20% from their highs in March this year.
How Europe plugged the Russian supply gap?
Russian gas supplies to its biggest buyer, Europe, almost stopped, which compelled EU buyers to increase their LNG imports from other-origins as well as switch back to thermal coal-based power generation to meet power demand.
Market reports suggest that about 14 gigawatts (GW) of coal-fired plants have been placed on standby, adding 1.5% to the EU’s total installed power generation capacity (920 GW). The majority are in Germany, followed by Austria and the Netherlands.
Europe increased its thermal coal imports from countries like Australia and South Africa to meet its fossil fuel requirement as exports from these two countries to Europe have surged more than 200% y-o-y in 2022 so far.
This has led to overstocking of coal with European utilities deferring their coal procurement to Q1 of 2023.
Europe’s LNG prices tumble, impacts coal
The absence of Russian pipeline gas resulted in increased imports from Qatar and the US. In fact, while European imports of Russian pipeline gas declined by more than 80%, shipments of Russian LNG to Europe ballooned by 50% during the first nine months of 2022.
This made EU gas storage facilities close to full (about 94%), resulting in tankers carrying LNG lining up at ports, unable to unload their cargoes, and prices tumbling. The price of benchmark European natural gas futures dropped more than 70% at 104 euros per MW, since hitting a record high in late August.
Another factor adding to the LNG price and demand drop was the uncommonly warm weather in Europe. In countries like Italy, Spain, and France, the temperatures and gas consumption were closer to August and early September levels.
Subsequently, the excess LNG supplies subsided the panic buying of coal by European utilities, negatively impacting prices.
Will thermal coal prices continue to fall?
LNG prices are expected to go up in December and January in case the cold winter months turn severe. However, as per weather forecasts there is a 50-60% probability that temperatures will be significantly above historic norms for the next three months, across much of the UK, and central and southern Europe. This means that LNG demand and prices won’t see any significant rise during the winter months, and thus thermal coal prices will remain under pressure.
The only factor that may provide support to thermal coal prices in the near term is the world’s biggest economy, China, relaxing its Covid restrictions resulting in improved demand for coal. However, in that case too, its domestic coal production has increased significantly this year, which may restrict any drastic rise in global thermal coal prices.
However, thermal coal prices touching the pre-pandemic levels seems a bit unlikely now as either supply concerns or changed LNG trade dynamics may keep demand and prices supported next year.
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