Though coal has a uniform colour, it has varying qualities for different uses. This year the world has focused on the surging demand for thermal coal used to generate electricity as Russia’s energy squeeze on Europe made prices soar.
At the same time the price of that used in steelmaking, known as metallurgical or coking coal, has collapsed. This has led to the rare situation of coking coal trading at a price discount to its sibling thermal. For the former price reflects a lack of demand, the latter one of supply. This split in fortunes will not last.
Europe’s travails over a lack of Russian gas have increased demand for thermal coal and driven its cost there up by more than 40 per cent during the second quarter. Not only has hard coking coal — that most sought after by steelmakers — failed to keep pace, its price has dropped nearly as much in percentage terms. The gap between the two had expanded to $215/tonne this month (using Australian benchmark prices), points out BMO Capital Markets. That has not occurred in at least a decade.
Blame the Covid-induced economic slowdown in China. Despite repeated false dawns, the country has not been able to completely quash the infection through its zero tolerance policies of testing and quarantine. That has affected industrial production. Even without these lockdowns, China’s property markets had already slowed. New housing starts are falling at the fastest pace since the global financial crisis.
The declining pace of construction has a big impact on the domestic steel industry, as it accounts for about a third of demand. Floor space starts and completions in May fell at annual rates not seen since the global financial crisis of 2008-09. Less domestic steel demand has, in turn, hit both iron ore and coking coal prices. These are important inputs for steel.
Eventually some of the coking coal usually reserved for steel may switch uses. When coking coal begins going into power plants, the discount with thermal coal should begin to close. By then, though, Europe’s economies may well have slowed as well. That would take some of the steam out of thermal coal too.
