Coal Prices Rise Again, Riding the Oil Surge

Coal prices have risen again after a recent slump, buoyed by the resurgence of global energy prices. According to Refinitiv, coal prices closed at US$139.3 per tonne on Thursday (2/4/2024) trading, up a slight 0.14%. This increase comes as welcome news following a 6.6% drop over the previous two days. The surge in coal prices is occurring alongside the renewed escalation of energy prices. Brent crude oil prices closed at US$109.28 per barrel on Thursday (2/4/2024) trading, soaring 8.03%. Meanwhile, European gas prices jumped 2.5%. Coal serves as a substitute commodity for oil and gas, with their prices complementing each other. As is known, oil and LNG trade flows have been disrupted following Iran’s closure of the Strait of Hormuz. Bloomberg Intelligence estimates that if LNG disruptions continue, additional global demand for thermal coal could reach 40-60 million tonnes. This figure is equivalent to about 4-6% of total global trade, significant enough to lift prices. Although economically sensible, the shift from gas to coal does not happen quickly. In Europe, switching capacity has shrunk due to the closure of coal-fired power plants and the increasing share of renewable energy. The switching process occurs gradually over weeks, not instantly. Nevertheless, signs of increased coal consumption are already emerging in Japan and Europe. The rise in coal prices is also supported by news from China. Sxcoal reports that China is repairing the Daqin Railway. This is China’s main coal transport rail line, connecting Datong (a coal mining base in Shanxi) and Qinhuangdao port (the main coal export hub). This line is crucial for China’s domestic coal distribution. Maintenance has already begun since 1 April 2024 and is estimated to take one month. This maintenance will undoubtedly impact coal transport volumes. Coal transport capacity drops significantly, as it can reach 1.2-1.3 million tonnes per day under normal conditions. For China, the direct impact is a reduction in coal supply to the market, which could drive up prices. However, the impact may be contained due to still limited electricity demand in China.