The end of cheap flights? Why the war in Ukraine will push the price of airfares

  • Record coal export volumes forecast for FY23
  • Coal remains an affordable source of electricity grid reliability
  • Coal is estimated to account for up to half of global electricity supply to 2035
  • India, Japan and South Korea have replaced lost Chinese demand for coal since 2021

What’s driving coal prices today?

Australian coal producers are set to generate cash margins not previously seen as coal prices hit an all-time high on the back of trade sanctions being imposed on Russia, the world’s third-largest coal exporter. Australia is the world’s second largest coal exporting nation, behind Indonesia, according to the Paris-based International Energy Agency. Around 70 percent of Australia’s coal production is exported. The remaining 30 percent is used to generate electricity for domestic consumption.

Australian thermal coal exports were 192 million tonnes in 2020–21, down from an all-time high of 213 million tonnes in FY20. The decline in exports can be directly attributed to labor shortages and supply chain constraints related to COVID. Adverse weather events also impacted production. Australian thermal coal exports are expected to recover to a fresh record of 212 million tonnes by FY23, as the impact of the pandemic subsides.

Russian coal sanctions come at a time of recovering global coal demand as COVID-induced supply constraints are overcome. Europe is 60 percent dependent on Russian thermal coal for its electricity generation, while 30 percent of its coking coal is sourced from Russia. Coking coal is used for steel production. This is a perfect setting for Australian coal producers, as global customers seek to lock in future supply agreements in an uncertain world.

Australian coal exporters were already earning record profits before recent hikes in coal prices arising from the war on Ukraine. ASX-listed coal producer, Whitehaven Coal, announced a record December 2021 half-year net profit after tax of $340 million, on account of an average achieved coal price of A$202/t. This price equates to an impressive 55 percent EBITDA margin. This average realized sales price compares to A$134/t in FY21. In its outlook statement for the remainder of the financial year, Whitehaven confidently anticipates demand for seaborne thermal coal to remain strong, in spite of record coal prices. This outlook is supported by international coal price indices at record levels today, driven by global supply-side constraints arising from the war on Ukraine.

Australian coal producers

Australia’s largest coal producer is Yancoal Australia, which is 65 percent owned by Chinese interests in Yanzhou Coal Mining. Other major shareholders include institutional investor Cinda International (16 percent) and Glencore (7 percent). This leaves a small free float of about 29 percent.

BHP is also a significant coal producer, although coal accounts for just 8 percent of Group revenue. This proportion is likely to decline in the years ahead as BHP exits more of its coal mining activities.

Whitehaven Coal and New Hope Coal are also major coal producers at 14 million and 10 million tonnes respectively.

The future of coal

Coal is a non-renewable energy source, and its use creates contaminated waste. However, it remains a reliable, secure and affordable source of electricity supply, providing cost-effective grid reliability for the industrialized world. While renewable energy is estimated to account for more than half of global electricity supply by 2035, this still leaves room for consistent demand for coal over the next 15 years, at least.

China has imposed an unofficial ban on Australian coal imports since November 2020, following Australia’s criticism of China’s response to the COVID outbreak earlier in that year. This could have been damaging to Australia’s economy but for a significant increase in demand from India in 2021, as well as new markets in Japan and South Korea. Now with sanctions placed on Russian coal exports, the world is scrambling for coal supply, and Australia is a major beneficiary of this shift.

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.

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