An employee walks in a coal storage yard at the Joban Joint Power Co. Nakoso coal-fired power station in Iwaki City, Fukushima Prefecture, Japan, on Wednesday, Aug. 1, 2012. With the loss of nuclear plants, which produced more than 25 percent of Japan’s electricity before the disaster, the country have had to rely on oil, coal and gas-fired plants. The cost of importing those fuels has driven the country into a trade deficit for 18 straight months while the current-account shortfall widened to a record in November. Photographer: Tomohiro Ohsumi/Bloomberg
A coal-fired power station in Japan © Bloomberg

Ahead of the G20 summit in Osaka later this week the anti-coal lobby has been out in force, calling on governments to phase out subsidies for the fossil fuel. Activists are preparing to inflate a blimp with a likeness of Shinzo Abe, Japan’s prime minister, standing in a bucket of coal, as they urge the country to stop building new coal-fired power plants.

For the moment, however, the coal industry has more pressing concerns, in particular competition from cheap natural gas, which has caused a steep drop in prices.

A year ago thermal coal, which is burnt in power stations to generate electricity, was trading at more than $100 a tonne. Today it sits at $70 a tonne and lower in some parts of the world.

The collapse in prices can be traced back to a glut of natural gas last year during a mild winter in Europe. A surge in US exports of liquefied natural gas and robust pipeline deliveries from Russia and Norway ensured the region remained well supplied into the summer.

As a result, European gas prices plunged from $10 per million British thermal units to around $3, prompting utility companies to switch from coal to gas. Citigroup estimates that current European gas prices are equivalent to a sub-$30 thermal coal price

That in turn has forced coal suppliers to Europe (mainly Colombian, Russian and US producers) to seek alternative markets in Asia, which itself has been struggling to absorb a glut of LNG from Australia and Qatar. That has added to the pressure on prices.

Other factors have also weighed. One is China’s effort to restrict imports of Australian coal in response to Canberra’s decision to bar Chinese telecoms company Huawei from providing 5G equipment.

Traders say it is taking 60 to 90 days for Australian cargoes to be discharged at Chinese ports, with loading rates as low as 500 tonnes a day and not the more typical 50,000. To compensate, buyers are demanding a $14 a tonne discount.

Given that backdrop, even the most bullish coal traders expect the market to remain weak over the next two to three months unless natural gas prices spike because of the heatwave in Europe or an escalation in tensions between the US and Iran. (Around a fifth of the world’s LNG has to transit through the Strait of Hormuz). Prices could also pick up if Russia and Colombia curtail supplies and demand in Asian markets remains firm.

A big test of sentiment will come in September when Japanese utilities and Australian producers agree latest supply contracts for high-quality thermal coal. These negotiations are used as a benchmark for deals across Asia and, with no new supplies of this highly prized material coming to market, the settlement price could surprise on the upside.

Copyright The Financial Times Limited 2023. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article