Over the past couple of months –essentially since touching a low in August 2020– global coal prices have surged. In January 2021 coal prices were at their strongest levels in almost two years (before experiencing a mild correction in February 2021).
For Indonesia this is a positive development as coal remains among the country’s top export products, generating plenty of valuable foreign exchange earnings. And while many countries have expressed their commitment to curb coal consumption for environmental reasons (for example, the biggest economies within the European Union have pledged to phase out usage of coal in their energy mixes in the next two decades), the economic powerhouses in Asia –including Indonesia– remain addicted to coal, particularly because it forms a (cheap) energy source for power plants that produce electricity for rapidly expanding Asian populations and economies.
What Explains the Recent Surge in Coal Prices?
The chart below shows a significant increase in coal futures since August 2020. This rise came after a steady two-year decline in coal futures that occurred between mid-2018 and August 2020. Before we discuss the recent rise in global coal prices, we briefly mention the main factors that had caused the decline in prices between mid-2018 and August 2020:
- Chinese customs tightened coal imports in 2018 because domestic supplies were abundant (while the country has also been curtailing coal production to combat heavy pollution at home). China in fact managed to build up record coal stocks amid a slowdown in electricity demand growth.
- The tariff war between the United States and China, which was initiated by former President Donald Trump, undermined economic growth in China (and global economic growth), hence demand for coal weakened.
- When international crude oil prices show a bearish trend, it tends to put downward pressures on other commodities, including coal. Crude oil prices showed a declining trend between June 2018 and April 2020.
- China and Australia began having diplomatic trouble in 2018 when Australia banned Huawei from participating in the development of the 5G network in Australia. Matters became worse when Prime Minister Scott Morrison called for an inquiry into the origins and early handling of the COVID-19 outbreak in China. Meanwhile, Australia also expressed criticism of China's human rights records and national security legislation. China responded by slapping bans and anti-dumping duties on various Australian products, including coal.
- The COVID-19 crisis disrupted the global economy in an unprecedented manner, hence triggering a sudden drop in demand for energy. For China COVID-19-related disruptions started in Q4-2019, while for the rest of the world disruptions were heaviest in the first half of 2020 (and particularly Q2-2020).
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