The COVID-19 pandemic has shaken energy markets to the core in 2020, creating volatility for fuel prices. The one energy source that has not blinked through is coal, a fuel that may come out stronger through the current crisis, a Rystad Energy analysis shows.
The price of coal was already depressed before the coronavirus crisis, and the damned curtailment in China during the lockdowns was accompanied by a domestic production drop, balancing the market. Oil, which is used as a fuel in coal mining, has grown cheaper and is seen by Rystad Energy as reducing coal output costs by a few US$/t.
“With ARA prices already so low, any cost decrease will potentially give struggling producers selling to Europe a little breathing room, rather than allowing prices to move down any further,” said Steve Hulton, Rystad Energy’s Head of Global coal research.
The large falls in the currency of the major coal exporting countries like Australia and Russia is a significant, but often overlook factor with regards to coal prices and margins. In mid-March, the Australian dollar hit a 17-year low as international investors sought the traditional safety of US dollars; the Russian ruble has also reached new record lows due to the collapsing oil price.
International coal traders are priced in US dollars, whereas the majority of production costs are generally denominated in local currency terms. Therefore, a weaker exchange rate vs the US dollar usually means higher local currency revenues (or lower costs when converted to US dollars).
“Either way, the higher sales margin gives producers maneuverability to accept lower US dollar coal prices if needed,” added Hulton.
However, foreign exchange movements will not help any US-based coal producers, and further export price weakness (plus ongoing local demand destruction due to gas competition) will only serve to hasten their demise.
A possible outcome of the COVID-19 crisis could be an unexpected subtle shift in public opinion and policy regarding the speed of transition towards a low carbon power generating future.
In a post-pandemic world, while having lots of problems, coal is considered to be a cheap and reliable source of energy to rebuild the economy. Also, in economies struggling to bounce back, there may be less scope for absorbing the unemployment associated with the end of coal mining and power generation. These factors could potentially lead to a slowing of the rate of the energy transition.
China is an example. Coal mining capacity is now reported as moving quickly back towards full capacity, and power generation is returning to normal levels. Thermal coal import demand into China, which rose initially on the back of domestic production shutdowns, is likely to total close to the 2019 annual numbers, though reports indicate that some ports have already reached their 2020 annual quota limits.
Read the article online at: https://www.worldcoal.com/power/23032020/covid-19-could-give-coal-an-unforeseen-boost/