How demonised coal is beating gold

Launceston — Amid carnage in the oil markets and sharp losses for other commodities such as copper, you may be tempted to think gold is the best option for a positive return. But coal beats the metal.

Coal’s image is increasingly that of a pariah fuel, demonised by environmentalists and shunned by investors wary of its role in climate change. But one of the top-performing commodities this year is coking coal, the higher-quality fuel used to make steel.

Coking coal futures on the Singapore Exchange, which mirror The Steel Index price for Australian free-on-board cargoes, ended at $159.98 a tonne on Monday, up 17.7% since the end of last year.

In contrast, spot gold ended at $1,513.91 an ounce on Monday, down 0.2% from end-2019, with the loss extending in Asian trade on Tuesday to around 1.5%.

And it's not just coking coal. Even thermal coal, used mainly in power plants, is looking fairly solid.

The weekly index price for thermal coal at Australia’s Newcastle port, as assessed by commodity price reporting agency Argus, was $64.87 a tonne in the week ended March 13, virtually unchanged from the $64.85 that prevailed at the end of 2019.

Lower-quality Indonesian coal with an energy value of 4,200 kilocalories a kilogram was at $32.77 a tonne, down 3.1% from the end of last year.

To put that into perspective, global benchmark Brent crude futures dropped 54.5% from the end of last year to their close of $30.05 a barrel on Monday.

Crude has been pummelled by a supply war breaking out between top exporter Saudi Arabia and number two Russia, after the breakdown of the agreement between the Organisation of Petroleum Exporting Countries (Opec) and its allies to curb output to bolster prices.

Oil markets have also been hit by a demand shock, with the coronavirus pandemic likely to knock out several million barrels a day of consumption as the skies are emptied of planes and people stay home.

Other commodities are also suffering, with spot Asian liquefied natural gas (LNG) cargoes down 35.3% from the end of last year, and London copper contracts down 14.3% over the same period.

Viral moment

So, why have coking and thermal coal managed to stand against the economic disruption caused by the coronavirus that started in the Chinese city of Wuhan late last year, spreading around the world since then and resulting in the lockdown of cities and countries and impinging on transportation links?

The coronavirus itself is part of the answer, as one of China’s main sources of coking coal, neighbouring Mongolia, closed its borders in February, cutting off up to 50% of China’s supplies.

Seasonal wet weather in Australia’s Queensland state, the source of the bulk of exports, also crimped available cargoes and led to price increases. Australia provides more than half of the global volume of coking coal exports.

While China’s economy was largely shut down for much of February as part of efforts to contain the virus, it has since re-started and coking coal demand is ramping up.

The Mongolian border has reopened, but Queensland is still having weather disruptions, keeping coking coal prices resilient. Hopes that Beijing will boost stimulus measures to bolster the economy have supported coking coal prices, as well as those for iron ore.

Benchmark 62% iron ore, as assessed by Argus, ended at $90.30 a tonne on Monday, little changed from $90.15 on the last trading day of 2019.

Thermal coal also benefited from the coronavirus as Chinese mines were either idled or working at reduced rates, boosting demand for imports of the fuel.

With China’s mines returning to normal, there may be an easing in demand for imported cargoes, but the imports are still competitive with domestic prices, meaning traders have a profit incentive to buy from top thermal coal exporter Indonesia and number two Australia.

Perhaps coking and thermal coal, as well as iron ore, provide an optimistic note that commodity prices can recover once the coronavirus is contained. 

Reuters