In the summer of 2008—at the height of the commodities super boom—Australian thermal coal prices exceeded $192/ton. For the next 13 years thermal coal miners suffered through long stretches of low-price environments, with prices never approaching 2008 levels and rarely exceeding $100/ton. However, after sinking below $47/ton in August of last year, Aussie thermal coal prices soared to a stratospheric $254/ton last month. The severe supply/demand imbalance in the current market is, at least in part, a direct result of these low-price environments which forced many of the world’s swing coal suppliers to permanently exit the industry, drastically reducing the international market’s reserve coal capacity. Without this reserve capacity, the coal market has been unable to meet the massive surge in global demand for energy at a time when others forms of alternative energy, particularly gas, have skyrocketed.

Efforts to expand coal supply have proved challenging on many fronts. First, in any year, mining firms approach new project mining investments with caution, resulting in a timeline of several years before operations commence. Second, while expansions of current sites can be initiated more rapidly, a heavy machinery shortage was constraining this option. Third, poor weather conditions, intermittent labour shortages at ports, and covid disruptions at mining sites have further disrupted operations.

After experiencing a wave of blackouts in many of its provinces, the Chinese government finally intervened, allowing power producers, that had been operating at a loss due to the high cost of coal, to pass on these higher prices to end users. The government instituted a price cap for many coal suppliers while also ordering an increase in production. These strategies appear to have been successful. As of 11th November China’s daily coal output was over 12mt/day, suggesting China’s domestic production will achieve a record month in November. Whether this increased production can close the gap between coal output and demand remains in question, as coal output was up annually by only 3.7% as of September while energy consumption increased by 12% over the same period.

Coal prices have contracted since its high in mid-October, losing over $100 in a few weeks , but seem to have found a floor at around $150/ton as of Friday. This steep decline in coal prices has discouraged trade as end-buyers delay purchases, choosing to wait for prices to stabilize. For those unfortunate buyers who contracted coal cargoes before the price fall, many are seeking to postpone shipments, which will likely lead to a significant cut in the expected coal shipments for the rest of November. More importantly, China’s policy decision to ramp up domestic production in order to combat rising energy costs will almost certainly dampen demand for imports in the near term, especially if China’s stockpiles remain at sufficient levels.

It is unclear how long trading can be delayed. For instance, India, which relies on coal for about 70% of its energy, is contending with stockpiles that remain dangerously low, with only six days of coal-burn available nationally. Colder than normal weather also threatens to strain China’s current stockpiles, which at coastal plants is only sufficient for 14 days, about 15% below last year’s levels at this point in the year.

If coal prices display further volatility as a result of stockpile declines, or in fact for any reason, coal trading activity will almost suffer in the short term. If prices stabilize at their current levels, coal trade may well increase in the short term but the wider dry bulk market will likely suffer in the medium term. For, even at $150/ton, the cost of energy will effectively serve as drag on Chinese and other Asian countries industrial production. On a positive note, 2021’s coal trade has been fairly tepid due to insufficient supply and high prices, and as demand for energy remains strong, any increase in coal supply next year will likely find a home.