By Andrew Prochnow
Since hitting a low in mid-December, crude oil prices have risen roughly 15% over the past eight weeks, reaching a recent peak of around $78 a barrel.
Throughout the last quarter of In 2023, oil prices faced downward pressure amid a deteriorating outlook for the global economy. However, the recent rise indicates a possible shift in sentiment among market participants, hinting at a reassessment of the possibility of a global economic revival in the second or third quarter of 2024.
If the oil boom continues, one of the big beneficiaries could be the coal market. The future of coal in Newcastle (an industry benchmark) have corrected about 70% since peaking above $400/ton in September 2022. And since early February, they’ve bottomed out at about $120/ton.
Similar to gross Oil, coal prices are highly sensitive to prevailing economic conditions, as demand in the coal market tends to fluctuate with the strength or weakness of the underlying economy. Like other commodity markets, coal prices are also heavily influenced by supply factors.
When coal supplies are tight and demand is high, prices usually tend to rise. Conversely, in periods of abundant supply and declining demand, prices tend to fall. However, the current market environment presents additional factors to consider.
Currently, global coal inventories are relatively abundant. Last year, global coal production reached a record of about 8.7 billion metric tons, marking a 2% increase from 2022.
Despite the abundant supply of coal, it is worth noting that prices have been on a downward trajectory for about 17 months, falling approximately 70% below their peak in September 2022. Given this prolonged decline, an increase in unexpected demand can serve as a catalyst for price change.
Coal power is mainly used for electricity generation worldwide. Therefore, if economic growth exceeds expectations in 2024, an increase in demand could cause a significant turn in coal prices, similar to what was witnessed in the iron ore market during the last quarter of 2023.
Current dynamics in the international coal market
When it comes to demand in international markets, China and India are two of the largest importers of coal in the world. This is not necessarily surprising, given that these two countries are the most populous of all countries on earth, and also comprise some of the largest economies in the world.
In absolute terms, China has been around for a long time the world’s number one importer of coal. But over the past two years, India’s economy has grown at a faster pace than China’s. During 2022 and 2023, India’s GDP grew by about 7% per year.
And like China, India relies heavily on coal to power their electricity grid. According to The Times of India, coal power accounts for approximately 70% of India’s total electricity generation on an annual basis. This means that if India’s economy continues to grow at a fast pace in 2024, additional coal imports are likely to be required.
Corroborating this point of view, the International Energy Agency [IEA] recently stated that increasing demand for coal from India will be the main driver of growth in the sector for the next few years.
To meet this level of demand, India has been producing more coal domestically and importing more from abroad. As highlighted in the chart below, India’s coal imports increased by 18% in 2023 compared to the previous year.
The aforementioned data indicates that continued strength in the Indian economy will be a pillar for the global coal market in 2024. But what about China?
As most investors and traders are well aware, the Chinese economy (and the stock market) have been under pressure since the start of 2021 (when the stock market sell-off began). And based on the latest data, China’s economy continues to be mired in irritation.
In the last quarter of 2023, the Chinese economy grew by 5.2%, which was below expectations – and also well below India’s current growth rate.
But what if China’s economy rebounded in the second or third quarter of 2024? If that happens, the bull case for coal prices becomes even stronger. Along those lines, an overall increase in global economic activity would also be enough to help boost coal prices, even if the Chinese economy continues to move sideways.
Major Investments/Trades Received
Based on the above information and data, investors and traders evaluating the Indian and Chinese economies – or the broader global economy – may consider a long position in the coal market at this time. On the other hand, market participants who think the global economy will continue to slow in 2024 may want to hold back before initiating a new position in the energy sector.
Before the pandemic, thermal coal prices were trading between $60-70/ton. This means that if current sales continue, coal prices could fall further. However, with India’s economy still humming and the summer season approaching, this seems quite unlikely.
According to India’s Central Electricity Authority (ICEA), electricity demand in the country tends to peak during the summer months, especially May and June, when temperatures rise to their highest levels. Electricity utilities and grid operators must anticipate and manage this seasonal increase in demand to ensure reliability and stability of electricity supply.
Similar to India, electricity demand in China also tends to increase during the summer months due to increased use of cooling systems, especially air conditioners. China, with its vast territory and diverse climate zones, faces varying levels of temperature extremes during the summer season, with some areas experiencing extreme heat.
Taken together, this information suggests that the recent slide in coal prices may represent an opportunity for those eyeing a possible economic rebound in 2024, especially with hot summers in India and China get closer to the calendar.
To track and trade the coal sector, readers can add the following names to their watchlists:
Alliance Resource Partners (ARLP)
Alpha Metallurgical Resources (AMR)
Arc springs (ARCH)
BHP Group (BHP)
Console power (CEIX)
CNX Resources (CNX)
Hallador Energy (HNRG)
NACCO Industries (NC)
Natural Resources Partners (NRP)
Peabody Energy (BTU)
Ramaco Resources (METC)
SunCoke Energy (SXC)
Teck Resources (TECK)
Warrior Met Coal (HCC)
Andrew Prochnow has more than 15 years of experience trading global financial markets, including 10 years as a professional options trader. Andrew is a frequent contributor The lucky box magazine.