COVID-19 may decelerate energy transition by an unforeseen boost to coal

COVID-19 may decelerate energy transition by an unforeseen boost to coal
COVID-19 may decelerate energy transition by an unforeseen boost to coal

The COVID-19 pandemic has shaken energy markets to the core this year, creating incredible volatility for fuel prices. The one energy source that hasn't blinked though is coal; a fuel that may come out stronger through the current crisis, a Rystad Energy analysis shows.

The price of coal already depressed before the coronavirus crisis. A domestic production drop accompanied demand curtailment in China during the lockdowns, balancing the market.

Oil became cheaper so Rystad Energy sees it as reducing coal output costs by a few dollars per ton.

So low ARA prices

"With ARA prices already so low; any cost decrease will potentially give struggling producers selling to Europe a little breathing room. It will not allow prices to move down any further," says Steve Hulton, Rystad Energy's head of global coal research.

The large falls in the currency of the major coal exporting countries like Australia and Russia is a significant. They often overlooked factor with regards to coal prices and margins. In mid-March, the Australian dollar hit a 17-year low as international investors sought the traditional safety of US dollars; the Russian ruble has also reached new record lows due to the collapsing oil price.

International coal trades are in US dollars; whereas the majority of production costs are generally in local currency terms. Therefore, a weaker exchange rate versus the US dollar usually means higher local currency revenues (or lower costs when converted to US dollars).

"Either way, the higher sales margin gives producers maneuverability to accept lower US dollar coal prices if needed," said Hulton.

However, foreign exchange movements won't help any US-based coal producers, and further export price weakness (plus ongoing local demand destruction due to gas competition) will only serve to hasten their demise.

Unexpected subtle shift

A possible outcome of the COVID-19 crisis could be an unexpected subtle shift in public opinion and policy regarding the speed of transition towards a low carbon power generating future.

In a post-pandemic world coal, while having lots of problems, is considered to be a cheap and reliable source of energy to rebuild the economy.

Also, in economies struggling to bounce back, there may be less scope for absorbing the unemployment associated with the end of coal mining and power generation. These factors could potentially lead to a slowing of the rate of the energy transition.

China is an example: Coal mining capacity is now moving quickly back towards full capacity, and power generation is returning to normal levels.

Thermal coal import demand into China rose initially on the back of domestic production shutdowns. It is likely to total close to the 2019 annual numbers. However, reports indicate that some ports have already reached their 2020 annual quota limits.

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