Coal use expected to return to record 2013 levels: IEA

Coal prices are skyrocketing and global coal consumption is expected to return to record levels reached nearly 10 years ago as the global energy crisis continues.

While investors in coal stocks are having a big day thanks to high coal prices, restrictions on carbon emissions are taking a back seat as markets and governments scramble to stock up on traditional energy supplies amid the shortages caused by the Ukraine war, analysts say.

Worse, slowing investment in new coal-fired power plants has tightened coal supply even further, Peter O’Connor, a senior analyst at Shaw and Partners, told CNBC’s “Squawk Box Asia” on Friday.

“Who would have thought that the dirty old bucks would have been the best performing stocks over the past fiscal year. It’s also the best performing sector so far this fiscal year,” said O’Connor.

“And looking ahead to the year ahead through the northern winter with gas prices in Europe and gas supply availability, countries are turning back to coal.

“And take care of it [of coal] is tight. Why? Because nobody’s construction capacities and markets will remain tight given the weather and Covid. So this market will remain high for longer, likely well into calendar 2023.”

Gas shortages are at the heart of the ongoing surge in coal demand as the European Union seeks to reduce consumption of Russian gas — and shies away from a gas ban — while Russia responds by halting supplies to the continent.

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The price of thermal coal, which is used to generate electricity, has risen by about 170% since the end of last year and rose sharply after the start of the Ukraine war.

In contrast, the other most traded coal, the steel ingredient coking coal, trades lower. Driven by different dynamics, the subdued economic growth in China is cooling steel production and thus also the demand for coking coal.

The International Energy Agency released a new report on Wednesday warning that global coal consumption is expected to rise 0.7% in 2022 to match the record set in 2013, assuming the Chinese economy recovers as expected in the second half of the year.

“The global total would match the annual record set in 2013, and coal demand is likely to continue to rise next year, reaching a new all-time high,” according to the IEA’s Coal Market Update.

“This sharp increase contributed significantly to the largest annual increase in global energy-related CO2 emissions in absolute terms, bringing them to their highest level in history,” the IEA said.

Global coal consumption has already recovered by about 6% in 2021 as the global economy recovers from the initial shock of the Covid pandemic, the IEA said.

Gas shortages are at the heart of the ongoing surge in coal demand as the European Union seeks to reduce consumption of Russian gas — and shies away from a gas ban — while Russia responds by halting supplies to the continent.

Coal consumption in the EU is therefore expected to increase by 7% in 2022, on top of the 14% increase last year, according to the IEA.

“This is being driven by demand from the power sector, where coal is increasingly being used to replace gas, which is in short supply and has seen huge price spikes following Russia’s invasion of Ukraine,” it said.

“Several EU countries are extending the lifespan of coal-fired power plants that are scheduled to close, reopening closed power plants, or raising the caps on their operating hours to reduce gas consumption.”

At the same time, the boycott of Russian coal is increasing upward pressure on coal prices, the agency said.

“Europe’s worst fears came true this week after Russia reduced inflows via the Nord Stream pipeline to 20% of capacity. Gas stocks may not reach enough levels to survive the winter,” said commodities analysts Daniel Hynes and Soni Kumari of ANZ Research in a note on Friday.

“With Europe’s spare import capacity limited, it will likely compete aggressively for LNG supplies.”

The global gas market, including Asia Pacific, is feeling the pain.

On Wednesday, Japan’s Nippon Steel Corporation signed an agreement with mining and trading giant Glencore to supply thermal coal at a price of $375 a ton, the highest price a Japanese company has paid for the commodity, according to Bloomberg.

All in all, rising energy costs continue to contribute to global inflation and force central banks to continue tightening monetary policy.

The Federal Reserve hiked interest rates by 75 basis points on Wednesday, the latest in a series of rate hikes aimed at curbing inflation.

https://www.cnbc.com/2022/08/02/coal-consumption-is-expected-to-return-to-2013s-record-levels-iea.html Coal use expected to return to record 2013 levels: IEA

Joshua Buckhalter

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