Are you interested in the coal market? Here’s an overview of key facts to know, plus a look at how to start investing in the space.
For thousands of years, coal has been an important source of heat and energy.
The fossil fuel played a crucial role in the Industrial Revolution, and today it’s the largest source of energy for electricity generation in the world — in total, coal generates 37 percent of the world’s electricity.
But is coal’s role in the energy landscape fading? Some say yes — the International Energy Agency (IEA) predicts that coal will generate only 22 percent of the world’s electricity in 2040.
Global coal demand has been on a slide in recent years, especially in Europe and the US, according to the IEA’s Coal 2020 report. The agency pegs 2013 as the year when worldwide coal demand peaked (at 8 billion tonnes), and expects that by 2025 demand for coal will have flattened to 7.4 billion tonnes.
Times and attitudes have changed, altering the trajectory of coal and leaving its future less certain than it used to be. “Renewables are on track to surpass coal as the largest source of electricity in the world by 2025. And by that time, natural gas will likely have taken over coal as the second largest source of primary energy after oil,” said Keisuke Sadamori, the IEA’s director of energy markets and security.
“But with coal demand still expected to remain steady or to grow in key Asian economies, there is no sign that coal is going to fade away quickly,” the expert added.
Read on to find out more about how to invest in coal and what the landscape looks like.
What is coal and how is it used?
Coal is a fossil fuel that contains the stored energy of prehistoric vegetation. According to the World Coal Association, it dates back to 360 million years ago, and was formed when swamps and peat bogs were buried due to shifts in the Earth’s tectonic plates. Subjected to pressure and heat deep underground, the plant material in the swamps and bogs underwent a chemical reaction, creating coal.
Coal is classified at various levels of carbon content, determining the amount and quality of energy it produces. The most commonly mined classifications are sub-bituminous coal and bituminous coal. The two other types of coal are lignite and anthracite.
Sub-bituminous coal is used primarily as fuel for steam-electric power generation. While bituminous coal is also used mainly as fuel in steam-electric power generation, it can be used for heat and power applications in manufacturing too. Additionally, bituminous coal can be used in the production of coke, an important ingredient in steel fabrication.
Top coal producers and consumers
The US, Russia, Australia and China are the countries with the largest proven coal reserves, representing 65 percent of total global coal reserves. As of 2019, the five top coal-producing countries were China, India, the US, Indonesia and Australia. China is by far the leader, producing 3.69 billion tonnes in 2019 compared to the next largest producer, India, at 745 million tonnes.
China, India, Japan and South Korea are among the largest importers of coal. That said, many of those countries have cut back their demand in recent years.
How to invest in the coal market today
Environmental concerns are one of the main reasons some market watchers believe coal’s role in the energy mix is set to fade in the coming years and decades. Both mining coal and burning it for energy are problematic, with two of the key issues being pollution and greenhouse gases.
Coal pollution, caused by the emission of contaminants such as sulfur dioxide, nitrogen oxides and mercury, affects human and environmental health; meanwhile, greenhouse gas emissions contribute to global warming. Climate change concerns are growing across the world, and attitudes towards coal have turned sour in many places in favor of renewable energy sources.
Many countries have laid out plans to phase out coal in the near to medium term, including Germany (which has the largest fleet of coal-fired plants in Europe), Canada, the UK, Finland, France, Chile, Ireland, Israel, New Zealand, South Africa and Denmark. Belgium has been coal-free since 2016. Global coal consumption is estimated to have fallen by 7 percent, or over 500 million tonnes, from 2018 to 2020.
On the flip side, during his time in office, US President Donald Trump sparked hope for a coal revival, and pulled the country out of the Paris Agreement, citing his support of the coal industry as one of his reasons for doing so. He also lifted a freeze on new coal leases on public lands and revoked a rule that had limited coal-mining companies from dumping debris into local streams.
With President Joe Biden now at the helm, the US will rejoin the Paris Agreement. In his first days in office, Biden signed an executive order directing federal agencies to help generate alternative economic activity in regions traditionally dominated by the coal industry, such as Kentucky and West Virginia.
Moving forward, the Biden administration has set a lofty goal of using 100 percent renewable energy for electricity generation by 2035. Many US utilities have already begun moving towards wind and solar power, as well as natural gas.
COVID-19 has also placed downward pressure on coal demand for electricity generation. According to a report from the World Bank, “Demand for coal has tumbled this year, with the COVID-19 pandemic accelerating an existing trend of declining coal consumption in favor of natural gas and renewables.”
Future investing in the coal market
Western nations are increasingly turning away from coal in favor of cleaner, more sustainable energy sources, which comes as a massive blow to the future of the global coal market. But strong demand from China and India is likely to prolong the life of the industry.
While China may have decreased its coal use in an effort to improve air quality, the Asian powerhouse is still one of the world’s fastest-growing major economies and is likely to remain the world’s top coal consumer for years to come. Together, China and India account for 65 percent of global coal demand. Coal consumption from Japan, Korea, Taiwan and Southeast Asia represents another 10 percent.
As China is such a huge player in the coal market, the price of coal is tied to its domestic and foreign policies, as well as its economy. This has caused some volatility in the price of coking coal in particular.
Coking coal prices are expected to do well in the short term as the global economy recovers post-coronavirus. Research firm to FocusEconomics forecasts that prices will average US$141 per metric ton in Q4 2021 and US$147 in Q4 2022. Thermal coal prices are expected to average US$62.60 per metric ton in Q4 2021 and US$63.80 in Q4 2022.
Overall, it seems that although coal use is on the decline, the fuel will still hold a place in the global energy mix for years to come. While Europe and North America turn to other energy alternatives, demand from China and India will likely keep the coal market afloat.
This is an updated version of an article first published by the Investing News Network in 2011.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.