Energy Crisis Bolsters Coal Demand, Jeopardises Commodities

Global coal demand is soaring because of high natural gas prices – a phenomenon which has intensified gas-to-coal switching in many countries.

Energy Crisis Bolsters Coal Demand, Jeopardises Commodities

The world is in the grip of an unprecedented energy crisis exacerbated by limited supplies from Russia, a post-pandemic upswing in demand, and unusually hot summers, which have increased the need for cooling. This has led to a higher demand for coal while negatively impacting many crucial commodities.

The Russian invasion of Ukraine, the effects of the pandemic, supply chain slowdowns, and climate shocks had already strained the market and impacted energy production. The situation worsened even further as the curtailment of Russia’s gas exports forced Europe to look elsewhere to meet its energy needs.

Now, with extreme heat waves being added to the mix, the challenges have only gotten deeper as people rely more than ever on cooling. Experts are getting increasingly concerned that these circumstances might just continue. “We are experiencing the first global energy crisis,” claimed Jason Bordoff, an energy expert at Columbia University whilst noting that the pinch was being felt around the world.

Fuel shortages and blackouts have plunged many countries into economic turmoil. South Africa has been plagued by blackouts as has Cuba. Pakistan has also been struggling with power cuts. Surging energy costs have sparked strikes and demonstrations in Argentina and Peru. Natural gas prices in Europe have reached record highs as the energy crisis grips the continent.

Hot summer weather has boosted fuel demand and forced industries to burn diesel instead of increasingly expensive natural gas. Miners in Europe and China are finding it difficult to tackle higher energy prices. Energy rationing has heavily impacted smelters and mining operations. This has caused considerable disruptions in production outputs. “The ripple effects are being seen globally, and I don’t think we’ve seen the worst of it yet.” Bordoff added. “It’s just an interconnected global system…When you put pressure in one place, it is felt somewhere else.”

Coal Demand on the Rise

With the energy crisis showing no signs of abating, coal demand is on the upswing. According to an IEA report, the world’s consumption of coal is set to increase in 2022 thereby taking it back to the record level it had reached almost a decade ago. Global coal demand is soaring because of high natural gas prices – a phenomenon which has intensified gas-to-coal switching in many countries. However, the global coal market is currently a bit tight as several countries have shunned supplies from Russia.

With other coal producers finding it difficult to ramp up production, prices on coal futures markets indicate that these tight market conditions could continue well into next year. Rail transportation constraints, weakening demand in China, and fears of a global recession could potentially threaten the sector. However, Moody’s Vice President and Senior Credit Officer Boris Kan pointed out that the heatwave-induced energy crisis in China was likely to boost the country’s reliance on coal-fired generation.

As things stand, US coal exports rose in the second quarter. According to S&P Global Market Intelligence data, shipment volumes increased 14.8% quarter over quarter to 21.6 million tonnes and climbed 4.6% year over year.

The US Energy Information Administration expected US coal exports to reach 87 million tonnes in 2022 and 98 Mt in 2023, up from 85 Mt in 2021. US coal production is projected to increase by 21 million tonnes year over year to 599 Mt in 2022, climbing to 601 Mt in 2023. In the European Union, coal consumption is expected to rise by 7% in 2022 on top of last year’s 14% jump. Several EU countries are in the process of extending the life of their coal plants which were scheduled for closure.

They are also reopening closed plants or raising caps on their operating hours to reduce gas consumption. In a similar vein, the Indian government is studying a potentially slower retirement of its aging coal-fired power plants along with the possibility of adding newer sites. With gas prices stubbornly high, many new hydropower projects proving too complex, and a planned roll-out of renewables that is still in its early stages, policymakers see a need to extend the country’s reliance on its coal fleet.

Commodities feel the heat

The energy crisis has put a lot of pressure on commodities industries which are the building blocks of the global economy. Energy-intensive sectors like steel, fertilizers, and aluminium – the most widely used base metal – are being forced to close factories or pass on soaring costs. In the US, the major aluminium producer Century Aluminum Co. stated that it was idling its massive Kentucky plant after energy costs made it unprofitable to run.

Europe has lost about half of its zinc and aluminium smelting capacity over the past year, and more is set to go offline. Norsk Hydro ASA said that it planned to shutter an aluminium smelter in Slovakia around the end of September while Nyrstar announced that it would halt the giant Budel zinc facility in the Netherlands. Materials which are crucial for electric-car batteries and generating solar power are also facing the brunt of the crisis.

Power cuts in China’s Sichuan have impacted more than 70% of local steel mills – either through production halts or rationing. This is putting pressure on prices of iron ore which is used to make steel. The battery sector is also bracing for higher costs of the key material lithium. According to BloombergNEF, Sichuan accounted for more than a fifth of China’s lithium chemical output last year and analysts expected prices to rise in the short term.

The province is also important for the output of the metal polysilicon which used in solar panels. The price of silicon metal, which can be found in everything from computer chips to cars, jumped 12% in just a week recently marking the drastic effect that the energy crisis was having on diverse commodities.

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