Coal is Expensive as the 2022/2023 Winter Season Approaches

Coal trades on the futures market on the Intercontinental Exchange (ICE). While the coal futures market is far less liquid than Brent or WTI crude oil or US, Dutch, or UK natural gas, historically, it is much less expensive. Producing power or electricity with coal costs a lot less than oil or gas. Meanwhile, the nuclear disasters in Chernobyl and Japan have caused many countries to avoid nuclear power plants in favor of fossil fuels. 

In a recent Barchart article, I highlighted the ICE Newcastle coal futures market’s ascent. ICE offers another coal contract for delivery in Rotterdam, the Netherlands. While both contracts are for 1,000 metric tons of thermal coal, like real estate, the prices are all about location, location, location. 

Coal in Australia travels to the world’s leading consumers

The Newcastle coal futures contract on ICE that reflects the fossil fuel price in Australia is critical as the world’s leading coal consumers, China, and India, are conveniently located for the Australian export market. 

The chart highlights at $452 on the September contract, the price was at a new all-time high on August 22. Before July 2021; the all-time high was at $139.05. 

Coal in Europe made a comeback because of the war in Ukraine

The war in Ukraine put upward pressure on all hydrocarbon prices in 2022. With crude oil and natural gas at multi-year highs, coal demand surged. Europe depends on Russia for oil and gas supplies, and concern over the future flow has caused coal prices to soar. 

Thermal coal for delivery in Rotterdam, the Netherlands, was at the $408 level on August 22. Before October 2021, the record peak was at the $224 level. The price reached a high of $465 in March 2022 as Russia invaded Ukraine. 

Environmentalists hate coal- A necessary evil in 2022

Coal became a four-letter word in the energy markets over the past years because of its impact on the environment and climate change. As the US and European energy policies moved towards supporting alternative and renewable fuels, they have inhibited oil, gas, and coal production and consumption. Of the three, coal has been the leading enemy of environmentalists.

Meanwhile, the world continues to rely on fossil fuels for power. Coal has long been a less expensive alternative to oil and gas, and in 2022, the rising prices have caused a resurgence in coal demand. China and India are home to over one-third of the world’s population, and do not follow the same environmental policies as the US and Europe. 

Even though many European countries have pledged to reduce their carbon emissions, coal demand is expected to rise by 7% in 2022 after a 14% increase in 2021. China’s coal demand fell by 3% during the first half of 2022 as COVID-19 lockdowns slowed economic growth.  Meanwhile, Indian coal consumption rose 9% over the first six months of 2022. Environmentalists may hate coal, but the energy commodity’s demand continues to increase.

Natural gas competes with coal, and the price has exploded higher

Over the past years in the US, natural gas replaced coal as an input in power generation. Natural gas may be a hydrocarbon, but it is a cleaner fuel for electricity production. The US natural gas price has soared since June 2020. 

After falling to a twenty-five-year low at $1.44 per MMBtu in June 2020, nearby NYMEX natural gas futures have rallied over 6.5 times to over $9.60 per MMBtu on August 22. In the US, coal demand bounced back after reaching a low in 2020 during the height of the pandemic. While it made a comeback in 2021 and 2022, renewable energy sources have experienced rapid growth. However, in China, India, and Europe, where energy concerns surrounding Russia have caused environmental issues to take a backseat to energy demand, coal has experienced a significant resurgence. In the US, the higher natural gas prices rise, the more the odds of more coal consumption increase. Natural gas is coming into the peak season, which starts in the futures market in October and November each year. 

Source: EIA

As the chart illustrates, natural gas in storage across the US is 10.5% below last year’s level and 12.7% under the five-year average for the week ending on August 12, 2022. Low US supplies and record-high prices in Europe and Asia could push US natural gas prices higher over the coming months. The initial target is the $10 level, a price not seen since 2008. Above there, a challenge of the 2008 and 2005 highs at $13.694 and $15.78 is possible given the global supply landscape. On August 22, the nearby contract reached $9.982 per MMBtu. A cold winter will only exacerbate price volatility and the energy commodity’s upside potential. The upward trajectory of natural gas is bullish for coal prices as coal is a substitute. 

Supply and demand fundamentals favor higher coal prices for three reasons

Three compelling factors support coal prices over the coming months:

The bottom line is that high coal prices will likely continue over the rest of 2022 and well into 2023. We saw lofty record levels in the Newcastle and Rotterdam coal futures contracts in 2022, but we could be looking down at those highs as technical support levels over the coming months. The trend in coal prices is higher, and the supply and demand fundamentals support a continuation of rising prices. 

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