Coal Prices Are Going Up — Blame Putin and Western Sanctions

Coal is among the dirtiest sources of energy. Environmentalists abhor the once-popular fossil fuel. Coal prices were in a structural decline but things changed in 2021. Coal prices have continued to move upwards in 2022 as well. Why are coal prices going up and what lies ahead?

First, it's important to understand that there are mainly two types of coal. Thermal coal (or steam coal) is used in power generation, while metallurgical coal (or met coal) is used for producing steel in blast furnaces. Over the years, cleaner sources of energy have replaced thermal coal in electricity generation. In the U.S., only about a fifth of the electricity is generated using coal and the figure has been gradually falling over the last few years.

As for steel, in the developed world, companies have been pivoting towards EAFs (electric arc furnaces), which don’t burn coal but use electricity instead as a power source. Several U.S. coal companies have gone bankrupt over the last decade as the country gradually pivots toward green energy.

Meanwhile, thermal coal prices started rising in 2021. There was demand disruption amid negative weather conditions in India and Australia. Also, the coal supply chain was impacted after China banned coal imports from Australia.

Russia is a major coal producer and exporter. In addition to coal prices, commodities including aluminum, nickel, palladium, and crude oil have seen higher prices due to fears of supply disruption from Russia.

Amid rising natural gas prices, some thermal coal electricity plants have been boosting production, which has led to an increase in coal demand. For years, natural gas has been replacing coal but there's some fungibility of demand in the short term. Rising natural gas prices lead to higher demand (and prices) for coal and vice versa.

While the West has imposed crippling sanctions on Russia, it has been relatively soft on the country's energy exports, which are the lifeline of its commodity-dependent economy. While the U.S. and the U.K. have announced a ban on Russian oil imports, most of Europe is still hooked up to Russian oil and gas.

However, reports of Russian atrocities in Ukraine have put pressure on the West to impose more sanctions on Russia. The European Union is contemplating a ban on Russian coal imports and sanctions on its oil imports. The move could be significant since the EU gets almost a fifth of its coal from Russia. The region’s reliance on Russian oil and gas is even higher.

Unlike crude oil, whose reserves are concentrated in a few countries, global coal reserves are evenly spread. China and India are already ramping up production and Australia can also chip in with more supply. Unlike crude oil, where it's tough to replace the Russian supply, especially as Iran and Venezuela are also sanctioned, replacing the Russian coal supply should be relatively easy.

Coal prices could remain high, but over the medium term, we should see prices fall since the world has made a decisive move towards greener and cleaner sources of energy.