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King Coal

July 04, 2008
Kip Beckman
Principal Research Associate,
Economic Services
Much is made of the impact that surging Chinese demand is having on world oil prices and there is no doubt that the country’s thirst for oil is responsible for a good chunk of the recent run-up in oil prices. However, often overlooked is the impact that China is having on another important source of energy in the world, namely coal. China has been both a major supplier and user of coal over the past decade or so. In the first half of 2007, China actually imported more coal than it exported for the first time, a development that has led to skyrocketing coal prices all over the world. Then, to top it off, a terrible snowstorm last January and the ensuing power outages resulted in Beijing suspending coal exports for two months. Since then prices in Asia have increased by more than 33 per cent and coal has subsequently attained record-highs in Europe and the United States.

Currently, the world uses coal for around 40 per cent of its electricity and the impact that China is having on prices is very similar to what transpired after the country became a net importer of oil in the early 1990s. However, the Chinese factor is affecting coal prices at a much quicker pace than has been the case for oil prices.

The sharp increase in demand for coal in China has taken place at a time when a number of other factors have placed additional strain on coal markets. Flooding at some mines in Australia in January has significantly reduced coal exports from this key market. The country’s over-crowded ports have forced ships to wait in long lines before loading the coal on board. Also, power shortages in South Africa and increasing demand have limited exports of coal to Europe. In Russia, another important exporter of coal, a shortage of rail-cars has hurt export growth as well.

The rising demand for coal has also had a positive impact on the industry in the United States where, until recently, buyers from Europe were not interested in purchasing U.S. coal. The China-led coal boom has increased wages and created more jobs for not only U.S. miners but also port and rail workers – a reversal of recent developments that have mainly seen industrial jobs move from the United States to China.

Some economists claim that coal prices should remain high even if the world economy enters into a protracted downturn. Coal is still relatively inexpensive and there are abundant supplies. Rapidly growing emerging countries including China, Brazil and India simply can’t get enough of the stuff. The demand for steel in emerging markets has led to an increasing need for coking coal used for steel. Thermal coal is also required for power plants.

It is not only emerging markets that need more coal. According to the Wall Street Journal, new coal-fired electric plants being built in the United States could add 50 million tons of new coal demand a year. Of course, this raises a dilemma in terms of the fight against global warming. Coal is a major source of greenhouse gas emissions and is out of favour with environmentalists. However, double digit growth in many developing countries is not going away anytime soon. This implies that the demand for coal will continue to surge over the next few decades, a development that will make it even more challenging for the world economy to slow down the growth in atmosphere-warming greenhouse gases emissions.

 


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