China, India push up coal prices amid push for green energy

TOKYO – The price of thermal coal used to generate electricity nears record highs as growing demand in China and India is met with reluctance to invest in new capacity in a world moving towards decarbonization.

While coal is sometimes called the least popular commodity due to carbon emissions, Asia’s two largest economies are currently still addicted to fuel, meaning rising costs could translate into fuel bills. higher energy levels and have an impact on economic activity if they persist.

The benchmark coal price was $ 177.50 per tonne on September 10, more than double the level at the start of the year and up from around $ 50 a year ago. The price is the highest in 11 years and is approaching the all-time high of $ 180 seen in July 2008.

“What we are seeing is a dilemma for investors, financiers as well as businesses,” said Shirley Zhang, senior analyst at Wood Mackenzie. “Despite efforts to move the entire region to a cleaner future, you will still need coal for the next 10 years.”

From aluminum to oil to copper, prices for many commodities have risen this year as demand has rebounded from the early days of the pandemic and speculators have piled in. But even in a white-hot market, the 110% jump in coal stands out.

In China and India – which together account for 65% of global coal consumption and are the two largest importers of fuel, followed by Japan and South Korea – demand has increased amid the scorching summer heat. and economic recovery have increased the need for electricity.

China’s major power producers generated 13.2 percent more electricity in the first seven months of this year than in the same period of 2020, according to the country’s National Bureau of Statistics. And they needed more charcoal to do it because a drought caused a drop in hydroelectric power production. The result was that in July, China imported 16% more coal than in the same month last year.

In India, after suffering a severe wave of COVID infections earlier this year, the economy rebounded to the point that gross domestic product from April to June grew at a record pace. Demand for electricity, and therefore for coal, is expected to increase further as the pandemic continues to ebb and the country’s rainy season comes to an end.

While demand is growing strongly, supply is not. Short-term disruptions have exacerbated the pressure this year, and there is little incentive to invest in new production when public policy is set on gradually reducing the use of coal to combat global warming.

“The balance between supply and demand is more likely to be easily upset because there is little new investment in coal mining,” said coal analyst Nobuyuki Kuniyoshi at Japan Oil, Gas and Metals National Corp. (Jogmec). Coal producers have little incentive to produce more coal and lower the price because they see no risk of their market share being taken by new competitors, he added.

In addition to being the world’s largest user and importer of coal, China is also the largest producer. But the government has restricted activity across the industry after fatal coal mining accidents and implemented reforms to discourage small-scale mining, which have the worst safety record. As a result, domestic coal production is less likely to increase significantly, even when the price skyrockets.

China has relied more on Indonesia and Russia for coal after effectively banning imports from Australia amid growing political tension and a trade war with Canberra. But Indonesia, the world’s largest coal exporter, began restricting overseas shipments last month after heavy rains disrupted production. The government banned the exports of 34 mining companies it said had given priority to the most profitable foreign customers instead of fulfilling their domestic obligations.

In late August, Indonesia rescinded coal export bans for three companies, including PT Arutmin, a subsidiary of the country’s largest coal producer PT Bumi Resources, after they complied with domestic market obligations. But restrictions on some companies are expected to continue at least until the end of this year, a coal trader said.

In Australia, the world’s second-largest exporter, coal producers cut capacity and workforce amid the pandemic last year and remain cautious about a dramatic recovery, Jogmec’s Kuniyoshi said, given the likelihood that demand will decline. long-term.

China aims to gradually reduce the use of coal from 2026 as part of its efforts to reduce greenhouse gas emissions, which means that its consumption will peak in 2025 and start to decline thereafter. . Chinese President Xi Jinping also pledged to peak China’s emissions by 2030 and make the country “carbon neutral” by 2060.

India aims to have around 60% of its electricity generation capacity installed from clean sources by 2030, mainly by making greater use of renewables.

Investors are also increasingly discouraging companies from investing money in new coal production – and banks from financing it – given the likelihood of a long-term decline in demand and the environmental damage caused. by fuel.

A coal trader said the current high price of coal will have a limited impact on encouraging Asian countries to switch to renewable energy sources in the short term. Coal “remains competitive” even in light of the recent surge while the price of liquid natural gas – the simpler alternative – is also on the rise, he said.

For the Asia-Pacific region, which accounts for around 80% of global thermal coal demand, the economic risk from rising coal prices will persist as long as fossil fuel remains its primary source of energy, Kuniyoshi warned.

Coal prices are on the rise but “that is unlikely to influence the pace of the transition much,” said Zhang of Woodmac, noting that the resilience of coal in the Asia-Pacific region is not just because it is cheap but because it remains the most reliable. and the fuel available. “It’s very likely that the incremental costs over the next two to five years will be around $ 80 or $ 90,” she said. “And that price is going to drop to that level and stay forever instead of going down to the $ 50 or $ 60 that we saw last year.”

But Yosuke Ikehara, energy project manager at WWF Japan, the environmental campaign group, told Nikkei Asia that the market move should alert the region. “The rise in prices offers a lesson that there is no guarantee that coal will stay cheaper.”