TOKYO -- The price of thermal coal used to generate electricity is nearing a record high as surging demand in China and India collides with a reluctance to invest in new capacity in a world heading for decarbonization.
While coal is sometimes called the least-loved commodity because of carbon emissions, Asia's two largest economies are currently still hooked on the fuel, meaning the rising costs could feed through to higher energy bills and impact economic activity if they persist.
The benchmark coal price was $177.50 per ton on Sept. 10, more than double the level at the beginning of the year and up from about $50 a year ago. The price is the highest in the past 11 years and is nearing the all-time high of the mid-$180s seen in July 2008.
"What we are seeing is a dilemma for investors, financiers as well as companies," said Shirley Zhang, principal analyst at Wood Mackenzie. "Despite the effort of moving the whole region into a cleaner future, you still need coal for the next 10 years."
From aluminum to oil to copper, many commodities prices have risen this year as demand rebounded from the early days of the pandemic and speculators piled in. But even in a white-hot market, coal's 110% jump stands out.
In China and India -- which jointly account for 65% of global coal use and are the two biggest importers of the fuel, followed by Japan and South Korea -- demand rose as the scorching heat of summer and economic recovery increased the need for electricity.
China's major power producers generated 13.2% more electricity in the first seven months of this year than in the same period of 2020, according to the country's National Bureau of Statistics. And they needed more coal to do it because a drought led to lower output from hydroelectric power. The result was that in July China was importing 16% more coal than the same month last year.
In India, after suffering from a severe wave of COVID infections earlier in the year, the economy rebounded to the point that April-June gross domestic product grew at a record pace. Demand for electricity, and therefore coal, is expected to increase further as the pandemic continues to ebb and the country's rainy season ends.
While demand is growing strongly, that is not the case for supply. Short-term disruptions have exacerbated the squeeze this year, and there is little incentive to make investments in new production when public policy is fixed on phasing down coal use to combat global warming.
"The balance between supply and demand is more likely to be disrupted easily as there are few new investments in coal mines," said coal analyst Nobuyuki Kuniyoshi at Japan Oil, Gas and Metals National Corp. (Jogmec). Coal producers have little incentive to produce more coal and lower the price as they see no risk of their market shares being taken by new competitors, he added.
As well as being the world's biggest user and importer of coal, China is also the largest producer. But the government has restricted activity across the industry after fatal accidents in coal mines, and has implemented reforms to discourage smaller mining operations, which have the worst safety record. As a result, domestic coal production is less likely to rise significantly even when the price soars.
China has been leaning more heavily on Indonesia and Russia for coal after effectively banning imports from Australia amid rising political tension and a trade war with Canberra. But Indonesia, the world's biggest coal exporter, began restricting shipments abroad last month after heavy rainfall disrupted production. The government barred exports by 34 mining companies it said had prioritized more profitable overseas customers instead of fulfilling domestic obligations.
In late August, Indonesia reversed coal export bans for three companies including PT Arutmin, a subsidiary of the country's top coal producer PT Bumi Resources, after they complied with domestic market obligations. But restrictions on some companies are expected to continue at least until the end of this year, one coal trader said.
In Australia, the world's next-largest exporter, coal producers slashed capacity and personnel amid the pandemic last year and remain cautious about dramatically scaling back up, said Kuniyoshi at Jogmec, given the likelihood that demand will shrink in the long run.
China is aiming to phase down coal use from 2026 as part of its efforts to slash greenhouse gas emissions, meaning that its consumption will reach a peak in 2025 and start to fall thereafter. Chinese President Xi Jinping also has pledged to bring China's emissions to a peak before 2030 and make the country "carbon neutral" by 2060.
India aims to have around 60% of its installed electricity generation capacity from clean sources by 2030, mainly by increasing use of renewables.
Investors are also increasingly discouraging companies from putting money into new coal production -- and banks from financing it -- given the likelihood of falling demand over the long run and the environmental damage caused by the fuel.
A coal trader said the current high price of coal will have a limited impact on encouraging Asian countries to switch to renewable energy sources in the short term. Coal "remains competitive" even in light of the recent surge while the price of liquid natural gas -- the easiest alternative -- is also rising, he said.
For the Asia Pacific region, accounting for roughly 80% of global thermal coal demand, the economic risk from rising coal prices will persist as long as the fossil fuel remains its major energy source, Kuniyoshi warned.
Prices of coal are up but "it's probably not going to influence the pace of transition much," said Woodmac's Zhang, stressing that the resilience of coal in the Asia-Pacific region is not just because it is cheap but because it remains the most reliable and available fuel. "It's very likely that marginal costs over the next two to five years are going to be around $80 or $90," she said. "And that price is going to drop to that level and stay forever instead of declining to the $50 or $60 we saw last year."
But Yosuke Ikehara, energy project leader at WWF Japan, the environmental campaign group, told Nikkei Asia that the market move should put the region on notice. "The price rise offers a lesson that there is no guarantee that coal remains cheaper."