Despite increasing efforts by major energy consumers to replace coal with cleaner fuels, volatile prices for other commodities like liquefied natural gas (LNG) have helped keep coal competitive for leading suppliers.
In the latest case of high gas prices creating a boon for coal suppliers, Glencore plc reported Tuesday that 2021 brought overwhelming results for its coal business despite a slight slip in volumes.
Global demand for thermal coal sent prices for the commodity soaring toward the end of the year. The company saw preliminary coal earnings at $900 million in the first six months of the year, but took in $4.3 billion in the last six months thanks to the spike. Prices for Newcastle thermal coal were up by an average of 125% year/year in 2021.
Along with supply constraints and drawbacks in commodity markets, executives at Glencore chiefly credited coal’s gain on soaring prices for competing fuels like liquefied natural gas LNG.
The International Energy Agency (IEA) reported in January that worldwide demand for electricity rose 6% year/year in 2021, but higher gas prices prompted consumers to switch to cheaper fuels, pushing up coal-fired power generation by 9%. Comparatively, natural gas-fired generation only grew by 2% last year.
China, which has been the world’s largest consumer of coal for over a decade, saw its demand for energy grow by 10% last year, making up about half of the worldwide growth in electricity needs, according to the IEA. Spikes in demand eventually led to power rationing in October and emergency spot purchases of coal and LNG that further inflated prices.
The nation also reached record levels of coal output last year, according to IEA, as the Chinese government encouraged mining companies to increase production.
Glencore, one of the world’s largest commodity traders, has increasingly diversified its energy portfolio with additional agreements for LNG with U.S. suppliers signed in 2021, but more forecasts for tight LNG production growth in the coming years and additional energy demand aren’t making coal any less competitive.
CEO Gary Nagle said similar market dynamics led by demand in Asia could keep demand for coal at healthy levels.
“Let’s see what happens after the Olympics, but generally across Asia, you are seeing significant demand for power as economies recover from the Covid impacts and with that, the competing fuel is LNG, which is also pricing at significant premiums to the equivalent of coal,” Nagle said. “So, the demand for coal remains strong.”
Major Asian coal-consumers like China, India and Japan have outlined goals to decrease coal consumption over the next several years to cut greenhouse gas (GHG) emissions, but increasing energy demand kept plans for more coal-fired plants in motion. China, India, Indonesia, Japan and Vietnam were in the midst of constructing more than 600 new coal units in 2021, according to the U.S. nonprofit Carbon Tracker Initiative.
But, if and when countries reduce coal consumption, it almost certainly means further reliance on LNG. In 2020, Shell plc Executive Vice President Steve Hill said the company estimated a 15% displacement of Asia’s coal capacity would create a 50% increase in gas-fired power generation by 2030.
The U.S. Energy Information Administration (EIA) reported in December that China had taken the title of largest importer of LNG from Japan, which had held the position for decades. China’s LNG imports averaged 10.3 Bcf/d between January and October – a 24% increase over the same period last year.
Natural gas prices are expected to stabilize and possibly decline into 2023, but LNG export prices will likely remain volatile in the near-term. Prices in Asia and Europe hit record highs of roughly $60/MMBtu last year as the global gas market tightened. More recently, prices in both regions have been following each other up and down as traders fret over potential supply disruptions related to geopolitical tensions between Russia and Ukraine.
Despite current market conditions that are making coal more profitable, Glencore is still focused on ramping down that side of the business.
Company executives said it isn’t making any changes to its strategy to gradually decrease its investments in the fuel source. Within the next three years, Nagle said the company expects to close three different mines as it aims to meet climate goals and the expectations of investors.
“We are putting our money where our mouth is, which is saying, yes, we will run down this business,” Nagle said. “We are not keeping those mines open because prices are good. We are shutting them down and we’ll continue to do that.”
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