Recent changes in Chinese policy have caused the once-dropping value of coal to rise again on the international market, with Australia in particular reaping the benefits.
After years of dropping coal prices due to global overproduction, this energy source has once again become a hot commodity on the international market.
The Sydney-based Whitehaven Coal reports that a few factors have contributed to this sudden upsurge in prices, including the closure of mines in Indonesia, Australia, and elsewhere around the world. But perhaps the biggest catalyst of all is a policy change by Chinese authorities to limit coal production to 276 days a year, a decision which will cut the country’s total output by 16%.
Global Overcapacity
China has long driven global demand for coal. The country burns more coal than the rest of the world combined, using the energy source to run its numerous power plants. But in 2014, China’s coal consumption began to stagnate and production dropped by 2.6%. In 2015, Chinese coal imports decreased by 30% to 204 million tons, and that number has continued to drop in 2016.
These developments led the International Energy Agency to forecast a bleak future for the fossil fuel in December 2015, based on the projection that coal demand in China would remain stagnant for the next five years. Goldman Sachssimilarly predicted a protracted dip in demand as recently as February, projecting that prices would fall to $42.50 per ton in the long term.
The reason for these anticipated losses? The coal industry faced a global supply glut, compounded by unceasing production in developing nations like India. After reaching its peak in 2013 and an average increase in production of 4.2% per year for the past decade, international coal production dipped in 2014 for the first time this century, falling by 0.9% to 7.92 billion tons. While the demand for thermal coal used in power production reached a high of 6.15 billion tons in 2013, Goldman predicted that that figure would drop to 5.98 billion by 2019. The IEA had a slightly more optimistic outlook, predicting that global coal use would continue to rise, but only at a miniscule rate of 0.8% per year.
Curtailed Production in China Helps Coal Rebound
By decreasing production, the recent policy changes in China have boosted domestic demand, which has in turn sparked a chain reaction and driven up the price of coal internationally. Consistent demand from other Asian countries like Japan, South Korea, India, Vietnam, and the Philippines has subsequently contributed to the resurgent prices, as has an increase in China’s power consumption — jumping 7.2% from last July to reach 552.3 billion kilowatt hours.
The Sydney Morning Herald reports that companies with operations in Australia have benefited in particular from this increase in coal demand, and major thermal coal exporters across the country — such as Anglo American and Glencore — have seen rapid increases in share prices since earlier this year. Australia is the world’s largest exporter of coal, producing more than 35% of the global total. Since the shift in Chinese policy, cargo prices of thermal coal from the country’s Newcastle terminal have risen to $70 per ton, an increase in value of more than 35% since mid-June. Whitehaven is confident that prices will continue to rise as the demand for low-priced energy steadily increases in Asia and around the world.
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