Thermal coal to feel lasting effects of recent price volatility

Global thermal coal markets have been struck by two recent and severe supply shocks; the Indonesian export ban in January followed closely by the Russia-Ukraine conflict. One of the implications has been the rapid increase of commodity prices at a rate not seen in decades, with thermal coal prices - which were already at record highs - rising by over US$125/t since the war started in late February, before easing back to around US$270/t at the time of writing. In our view, the conflict has effectively added a ‘conflict premium’ to the price of all raw materials including thermal coal, and we notice a similar phenomenon in metallurgical coal also. This premium is due to the uncertainty around the ongoing availability of Russian supply and whether sanctions could or would be enforced.??At present, we estimate this 'conflict premium' to be in the range of US$50-100/t for Newcastle 6,000kcal thermal coal.?

As the chart above shows, these shocks have had a profound impact on global energy prices due to Russia?accounting for around 14% of total supply.?This brings additional complexity to forecasting price for the next few quarters, as it is unclear how long the conflict will continue – and also whether Russian coal exports will be either officially or unofficially (i.e. by the market due to counter-party risk or financing issues) sanctioned.?An additional complexity is the potential for coal transactions to be priced in other currencies, as we understand that India and Russia are currently possibly developing a currency arrangement to facilitate ongoing trade with Russia, which would bypass sanctions should they be imposed.?

Amongst this, many European?countries have reopened mothballed coal-fired generation to overcome their short-term power needs as renewables have under-performed and gas prices have been extremely high (see our note on the impact of?a conflict premium).?This unexpected move came despite recent pledges by nearly all Western European nations to effectively exit coal entirely by 2030, and if the sanctions on Russia are extended to energy, may result in a disrupted implementation of COP26 pledges.

Commodity Insights’ innovative market data and?insights portal -?Thermal Coal Unlocked?- covers key aspects of the global thermal coal trade. It includes an independent price forecast compared to consensus and contains over 1000 key thermal coal data series, feeding your analysis and data management system with the best sources in just several clicks.?For more information contact?[email protected]??