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.

Thirdly, the bad weather that occurred over all coal-producing countries has impeded global coal production. Recent examples are the extreme weather events that hit China in July-August, such as flooding and heat waves, which have prompted domestic coal producers to halt their mining operations. At the same time, the extreme weather has also boosted demand for air-conditioning in China.

Another example is the flooding that occurred in Indonesia’s coal-producing provinces, which suppressed coal production in the first quarter of 2021.

The fourth and final issue is a long-term one. The expectation to switch from fossil fuels to renewable energy in the near future has driven up coal prices. Given the low cost of converting coal into energy, it causes massive environmental externalities. Converting coal into energy produces greenhouse gases (GHGs) as a byproduct that jeopardizes our environment.

To cancel the negative impacts of coal use on the environment, many countries have started declaring a coal phase-out, including Indonesia. This is beneficial for the future of renewable energy, but not for coal. The ongoing declarations of aggressive coal phase-outs have disrupted expectations for future coal supplies. Many thus expect coal to become a scare commodity in the future, which has boosted the current price of coal.

While we see that these four factors have been pushing up coal prices, there are also foreseen events that will normalize the temporary surge in coal prices. First is the upcoming tapering of the US Federal Reserve’s (Fed’s) quantitative easing (QE) policy, and second is the warmer bilateral relationship between China and Australia.

Historically, the Fed’s QE tapering has correlated with commodity prices. This affects not just coal, but also other energy commodities such as crude oil and crude palm oil (CPO). Whenever the Fed increases the interest rate in order to reduce the amount of dollars in circulation, the price of coal is adjusted downward. However, to what extent that the QE tapering could affect coal prices remains to be seen.

The warmer bilateral relationship between China and Australia could correct the current coal price, as China’s coal shortage has contributed significantly to the price surge. According to Bloomberg data, without Australian imports, China has been unable to match its coal import volume in January-June 2021 to the volume of coal imported in January-June last year.

To sum up, we see that the current trend in world coal prices requires all enterprises that rely on coal to be extremely cautious before taking any business decisions. Waiting for the trend to become less unpredictable could be key to benefiting from the momentum. Furthermore, coal enterprises should also take into account the global commitments to phasing out coal.

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Industry and regional analyst at Office of Chief Economist, Bank Mandiri

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