Key northern hemisphere energy consumers have ramped up their coal consumption in recent weeks amid freezing weather and an LNG supply crunch.
Electricity demand in China, Japan and South Korea has all soared and northeast Asian coal-fired power generation in December-January is likely to hit a multi-year high as governments turn to the solid fuel to keep the lights on amid the cold spell.
European thermal coal usage also looks likely to be higher on the year as less competitive gas prices and below-average temperatures more than offset the impact of fresh Covid-19 related lockdowns.
The demand rise is primarily weather-driven. Beijing on 7 January recorded its lowest temperature since 1966, while the temperature was on average 5.9°C below the 10-year seasonal norm between 1-11 January, according to meteorologist Speedwell Weather.
South Korea and Japan have also been hit by colder-than-usual conditions and heavy snowfall, and the temperature in Seoul and Tokyo was a respective 5.9°C and 1.7°C below average on 1-11 January.
But the situation has been exacerbated by policy decisions. China's informal ban on Australian coal imports has resulted in a sharp drop-off in coal supply, particularly as domestic mining firms have struggled to sufficiently ramp up production to meet the shortfall.
Chinese buyers have turned to alternative origins of supply including South Africa and Colombia, but these volumes are unlikely to arrive in time or in sufficient quantities to meet short-term demand requirements.
Colombian producer Drummond loaded 164,210t for China in December — the firm's first cargo for China since July — but the vessel is unlikely to arrive before next month. Fellow producer Cerrejon is also said to have sold cargoes to China, but the producer only resumed exports in December following a three-month strike.
In Japan, power prices this week hit record highs above ¥200/kWh. This is perhaps unsurprising given just three of its nine operational nuclear reactors are on line. January nuclear capacity is less than half of January 2020's level, as units are off line for maintenance, counter-terrorism upgrades and owing to legal injunctions.
In South Korea, the government may be forced to ease some of the winter restrictions on coal use — a policy intended to curb fine dust emissions — to cope with the demand surge. Nuclear availability is higher on the year, but the scale of the demand crunch was shown by a South Korean buyer paying $25/mn Btu for a first-half February cargo on 7 January. And this week, a deal for a 11-15 February delivery to northeast Asia was done at $39.30/mn Btu. By contrast, Argus' LNG des northeast Asia front-month assessment averaged $4.69/mn Btu in January last year.
In Europe, combined coal-fired power generation across Germany, Spain, the UK and France increased by 11pc on the year to 6.1TWh in December. And demand has risen further in early January, albeit from a low base, with Madrid hit by a deluge of snow and amid low regional wind generation.
Higher coal price floor
Forward prices suggest that the demand surge will wane as the first quarter draws to a close. The API 4 curve is in steep backwardation, with the February contract trading at an $8.05/t premium to the calendar 2022 yesterday.
But the API 4 and API 2 calendar 2022 contracts have still risen by more than 25pc since the lows of early November and are now trading at near 18-month highs. This suggests that although prompt prices are likely to decline once the winter cold moves out of view, the need for restocking and improving economic prospects globally have shifted the medium-term coal price floor higher.
The latest climate models indicate that the La Nina phenomenon — which is associated with the cold front in east Asia — could persist into the second quarter, which will pose a new set of risks for the market, namely surrounding a possible increase in early Monsoon rains across the Indian subcontinent.
Government policies to boost infrastructure development and stimulate growth following the Covid-19 slowdown may also support coal demand from the cement sector, particularly in economies such as Pakistan and India.