While many believe that coal prices will soon peak, the trend is still showing unpredictable upward movement day by day. This leaves massive uncertainties for enterprises that rely on this commodity.

In our view, the current coal price has far exceeded the fundamental price, which we estimate should be around $70-80 per mt. We therefore believe that enterprises need to be very cautious before calling for expansion during this price surge. Taking the wrong business decision during this temporary surge may permanently set unprofitable operational costs for enterprises, as the current price of coal could fall to the fundamental price at any time.

In more detail, we have observed that some causes contributing to soaring prices are worth highlighting. These causes are relevant not only in the short term, but also in the long term.

Firstly, the global recovery from COVID-19 has accelerated demand for energy to support activities toward economic recovery. The fact that many countries are still using coal as their main energy source is leaving them with a highly positive correlation between economic growth and coal demand. This in turn triggers demand-pull inflation in coal prices whenever coal-supplying countries do not immediately fulfill demand. Further, in the current circumstances, it is difficult for many countries to satisfy their coal needs because they lack coal production capability, as well as the differences in their recovery and growth rates and inter-country mobility.

Secondly, China’s “unofficial” ban on Australian coal has put global coal exports and imports out of balance. This ban has backfired and entangled China, the world’s largest coal consumer and producer, in a situation where they are finding it difficult to fulfill their domestic coal demand.

The amount of imported Australian coal that China needs to replace is enormous. However, China has undertaken great efforts to meet its domestic coal demand, for example by increasing coal imports from Canada, Colombia, Indonesia, Mongolia, the United States and Russia. Even so, China’s measures still have a loophole, as they have motivated several coal producers other than Australia to set a higher price for the coal exported to China.

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