On the back of severe domestic coal shortages in China and India—Asia’s two largest thermal coal consumers—coal prices have more than tripled since the start of 2021. The shortages have caused blackouts and factory shutdowns, which demonstrate the region’s reliance on fossil fuels. However, even European demand has increased in the face of rising gas prices, despite pressure resulting from climate change politics. And as winter approaches, investors are becoming increasingly bullish in the sector.
Why the Shortage?
China’s economic growth is driven primarily by energy-intensive industries like steel, cement, and chemicals. Last year, it built “more than one large coal plant per week,” according to Finland’s Centre for Research on Energy and Clean Air. And government price controls for electricity have meant little incentive to make existing factories or homes more efficient. Moreover, the domestic supply of coal has been impacted recently by a clampdown on safety regulations following fatalities in several locations. The reforms had discouraged some smaller operations, although now Beijing has eased some of the restrictions, relaxed production quotas, and instructed shuttered mines to reopen.
In India, flood and monsoon-related supply disruptions between June and September have driven coal stockpiles to dangerously low levels, exacerbated by a spike in economic activity following India's second COVID wave between April and August. Coal accounts for 70% of India's electricity, and as of October 6, half of the country's coal-fired power stations had only a two days' supply.
Export Supplies Are Also Under Pressure
Indonesia, which is responsible for 40% of global coal exports in 2020, has also been hit by debilitating rains. And Australia, the second-largest coal exporter, has suffered labor shortages due to the pandemic. That's of little consequence to China, which has stopped its Australian imports owing to growing political tensions between the two nations. And it appears that Russia, the third-largest coal exporter, is helping to fill the gap. Its exports are up 11% on 2019 figures.
Will Coal Miners Increase Production Capacity?
Of course, the question investors must ask is whether their renewed enthusiasm will prompt coal producers to invest in increased production capacity. Shares in Bumi Resources, Indonesia's largest producer, have shot up 70% since August. But a company representative says it doesn't intend to increase its current production target of 83 million to 87 million tons, in spite of the supply shortage.
Australian and Indian producers have seen similar climbs in valuation. For example, China's Yanzhou Coal Mining’s Australian subsidiary, Yancoal Australia, has grown more than 80% since August. The state-owned Coal India, the biggest coal producer globally, has climbed more than 30%. The trend is contrary to global benchmarks like the Nikkei or China's CSI300, which have remained flat. Similarly, the MSCI World or All Country Asia Pacific indexes were negative at the end of August.
Even given its rising costs, coal remains comparatively cheap—about a third of the price of natural gas. Without a reliable and cost-effective replacement, coal prices should remain stable or slightly elevated in the short- to medium-term—almost certainly remaining above $200 per ton, at least for the remainder of the year. However, it's doubtful Indonesia and Australia will significantly invest in new capacity given the global push to move away from fossil fuels. It's more likely that dwindling demand from America and Europe will shift to Asia without increasing global totals. That said, Australia’s environment minister has just approved a coal mine extension by Glencore.
Will Coal Shortages Hasten the Move to Green Energy in Asia?
It’s long been expected that Asian nations will continue to chase growth over climate accommodations in the short- to medium-term. In other words, they are predicted to lag behind the West in the transition to clean energy sources because fossil fuels offer comparably affordable options.
But now, some experts are suggesting an unstable coal supply may provide the necessary push for Asia to invest in clean energy. At this point, climate policy is impacting supply more than demand, providing an environment for price and supply volatility. And if coal supply chain disruptions impact China's production, its reputation as a reliable manufacturing base could be permanently harmed. It has already promised the United Nations that it will stop building coal power stations overseas and pledged to be carbon neutral by 2060 and reach peak emissions before the end of this decade. And even though coal production is currently being increased, so are controls on high energy-consuming projects. And China accounted for half of the global renewable energy capacity created last year.
India isn't committing to net-zero emissions yet, but it is targeting 450 GW of renewable capacity by 2030. And recently, a tender for a 4 GW solar manufacturing facility was put out by Coal India. The fact that solar energy is predictable and stable could be driving Indian Prime Minister Narendra Modi’s desire for his country to become “energy independent” by 2047.