Woke Energy Policy has increased demand for coal

[dan_s]

How ironic is this? The Green New Deal will increase the burning of coal for power generation.

BofA Equity Research

Coal prices hit record highs on global gas crisis…
Thermal coal prices have continued to skyrocket reaching the highest levels on record,
with both prompt Australian Newcastle and European API2 coal breaking $250/t early
this week. The coal market’s rally started earlier this year as demand rebounded from
the pandemic and producers struggled to meet the call after slashing output last year as
prices neared record lows (see Coal steams ahead). That said, the exponential move in
coal prices that has unfolded in the last few weeks is linked to a historic global gas rally
as European gas inventories have struggled to refill ahead of winter. While coal prices
have quadrupled from the lows last fall, European and Asian gas prices have jumped over
20x. Expensive gas generation is now rotating to an already tight thermal coal market.
…boosting demand as utilities switch fuels…

As the European storage outlook has turned increasingly dire, TTF gas prices have nearly
doubled over the last 16 trading days. Newcastle and European API2 coal prices jumped
60% over that same timeframe. While European coal generation was handcuffed by
record carbon prices in the early parts of the summer, soaring TTF ngas prices have now
unlocked the gas-to-coal switching lever. Additionally, China has posted record thermal
generation this year with output jumping 14% YoY through August, even if high fuel
costs have sidelined some generators. Chinese thermal generation has been powered by
an economic recovery and a drop in hydro generation.

…just as global supply continues to struggle
Meanwhile, producers have struggled to meet increased demand. In Indonesia, the
world’s largest coal producer, heavy rains flooded mines and high river levels affected
barge movements. In addition, a Covid surge in July and difficulty sourcing mining
equipment kept Indonesian production relatively flat to 2020 levels. Meanwhile, other
major coal producing countries have fared worse, with Colombia production down 8%
YoY through August, South African supply slipping 11% yoy, and Australian output
declining nearly 3% through July. As a result, prices have surged to find more supply and
destroy demand. Now, even the highest cost producers have responded, such as the US
with exports up nearly 50% yoy, but it hasn’t been enough.

Winter upside risks, but prices to normalize in 2H 2022
Given the tight supply/demand picture, thermal coal markets remain exposed to upside
risks this winter as surging global gas markets look to shed demand. Extreme volatility
could continue across the energy complex, especially into the start of the winter, as
below normal temperatures could exacerbate the supply situation and send prices even
higher. While production issues have certainly contributed to market tightness in the
near term, we continue to expect supply, which was easily able to fulfill 2019 demand
levels, to catch up in the back half of 2022. That said, in the near term upside risk
remains on tight global energy supplies. We boost our Newcastle forecast to $225/t in
Q4, $145/t in 2022 and $100/t in 2023, roughly $10-15/t below current forwards.