Energy security concerns and surging prices could give coal industry a new lease on life
'There is ... an almost complete absence of surplus thermal coal available globally,' says analyst
The chief executive of an American coal company couldn't find the words to describe how commodity prices in his industry have increased to sky-high levels.
The value of coal has increased 10-fold, from about $50 US per tonne to $500 over a two-month span, said Ernie Thrasher with Xcoal Energy & Resources, while on stage at the CERAWeek energy conference in Houston last week.
"There's just not enough to go around," he said.
"People are scrambling."
The Russian invasion of Ukraine has had an impact on many commodities, from oil to wheat, but the ripple effect may be the most substantial for the coal industry. The surging price and energy security concerns around the globe could provide a new lease on life for the least-liked fossil fuel.
European countries, in particular, are desperate for energy as they try to reduce their reliance on imports of Russian commodities.
Thermal coal, which is burned in power plants to produce electricity, was already experiencing a comeback of sorts last year with prices and consumption on the rise. The Russian invasion in recent weeks has resulted in an extra jolt to the sector.
For many years, there has been a lack of investment into the industry as a whole, said Thrasher, CEO of Xcoal. That's affecting production at mines as well as the availability of other equipment, like coal-carrying train cars.
"Everything we read about is: 'coal is not going to be here in 10 years,'" he said.
"I don't want to be jocular about this, but if you have 'coal' in your company name, you have a hard time opening a bank account to put money in the bank, let alone taking money out of the bank."
Trasher said the industry often has to borrow money at high interest rates from private equity firms and other sources of financing.
One of the goals of the UN climate conference in November was to "consign coal to history" because of its high levels of pollution.
The amount of coal-fired electricity declined three per cent in 2019 globally and by 4.6 per cent in 2020, according to the International Energy Agency (IEA). However, the trend reversed in 2021 as coal generation was up 15 per cent in the first half of the year.
Europe's energy needs
Rising natural gas prices were one reason for coal's reversing fortunes in 2021. Now, prices are surging primarily because of energy security concerns in Europe.
Several countries in the European Union (EU) are planning to phase-out coal-fired power plants in the coming years, in favour of natural gas-fired facilities and renewable power, as they try to reduce greenhouse gas emissions.
In recent weeks, however, those plans are being re-considered because Europe relies heavily on Russia for natural gas.
"Europeans are looking at coal and thinking, 'Actually, it might be easier if we rely on coal a little bit longer as we start to reduce our dependency on gas,'" said Coralie Laurencin, a London-based senior director at S&P Global, focusing on European power, natural gas, coal and renewables, during the CERAWeek conference.
There are several coal-fired power plants that are slated for closure by 2030 in Europe, she said, and those closures could be delayed.
On average, natural gas power plants produce 50 per cent less emissions compared to coal, according to the IEA.
The EU unveiled a plan last week to reduce Russian natural gas imports by two-thirds within the next 12 months and end the reliance on all Russian fossil fuels "well before" 2030.
Currently, Russia produces about 40 per cent of the EU's natural gas supply, and also provides 70 per cent of thermal coal imports.
If tougher sanctions targeting Russian coal are introduced or if there is a physical disruption to the Russian rail terminals or ports, then "the sky's the limit" on how high prices could climb, according to Rystad Energy research.
"There is simply an almost complete absence of surplus thermal coal available globally," said Steve Hulton, vice-president of coal at Rystad Energy, in a statement.
Last month, Vancouver-based miner Teck Resources posted a record-high fourth quarter profit of nearly $1.49 billion compared with a loss of $464 million a year earlier. Despite the boost in revenue from its coal production, company executives said they may consider selling a stake in those operations as a step toward Teck's goal of reaching net-zero carbon emissions by 2050.
The company produces metallurgical coal, used to produce steel and other products. Coal will become a smaller part of Teck's portfolio as the company grows its production of copper. Teck could sell a stake in both its coal and oilsands businesses to reduce the company's carbon intensity and appease shareholders.
"Both coal and oilsands will be a lower percentage of the portfolio," chief executive Don Lindsay told analysts on a conference call.
"We love the (coal) business. As you can see, it's a tremendous cash generation business."
- The article was updated to clarify that Teck produces metallurgical coal, not thermal coal. Teck will also reduce exposure to the coal business as the company grows its copper production, in addition to considering a possible sale of a stake in its coal business.Mar 16, 2022 12:13 PM ET