The surge in the spot price of liquefied natural gas (LNG) has dragged seaborne thermal coal prices higher, but only for the higher quality grades that can substitute for natural gas in power generation.
The spot price of LNG in Asia more than doubled last week as the market digested the loss of nearly 20% of the global supply of the super-chilled fuel after the U.S. and Israeli strikes on Iran effectively closed the Strait of Hormuz, shutting off Qatar's LNG.
LNG for delivery to North Asia LNG-AS jumped 116% to a two-year high of $22.50 per million British thermal units (mmBtu) in the week ended March 6.
The surge in LNG prices has opened the window for gas-to-coal switching in Japan and South Korea, the two Asian countries with the biggest ability to arbitrage between the fuels used to generate electricity.
Japan and South Korea predominantly buy Australian thermal coal with an energy content of 6,000 kilocalories per kilogram (kcal/kg), and the index of this fuel at Newcastle Port, as assessed by commodity price reporting agency Argus, rose to $129.62 a metric ton in the week to March 6.
This was a 14-month high and up 11.6% from the week to February 27, which was the day before the U.S. and Israel launched an aerial campaign against Iran, prompting Tehran to fire missiles and drones at targets across the Persian Gulf region.
EUROPE GAINS
The price of thermal coal heading to Europe, the other region where gas-to-coal switching can happen, also increased, with McCloskey assessing 6,000 kcal/kg coal from South Africa's Richards Bay port at $113.00 a ton on Monday, up 14.3% from $98.90 on February 27.
It's worth noting that the gains in seaborne thermal coal are considerably smaller in percentage terms than the rise in spot LNG prices.
This is likely because there is no threat to the supply of thermal coal from major exporters such as Australia, South Africa, Indonesia and Colombia.
But it's also the case that while the economics of gas-to-coal switching are currently attractive, the ability to do so is constrained by a lack of available coal-fired capacity, especially in Europe.
For example, Spain retired 13.18 gigawatts (GW) of coal-fired capacity from 2000 to 2025 without adding any new plants, while Germany shut down 33.57 GW of capacity while adding just 13.69 GW, according to data from the Global Energy Monitor.
Japan retired almost 1,200 megawatts (MW) of coal-fired capacity in the past three years, without adding any new units.
While South Korea has boosted its coal-fired capacity in recent years the government has formally committed to a long-term phase-out of the fuel, planning to close 40 of 61 units by 2040.
The longer-term policy doesn't preclude a switch to more coal in the short term if LNG prices remain elevated.
It's still too early to ascertain if countries that can burn more coal for electricity are lifting imports, although analysts DBX Commodities are estimating that the European Union's seaborne thermal coal imports will rise to 2.17 million tons in March from 2.01 million in February.
Japan's March imports of seaborne thermal coal are estimated by DBX at 9.52 million tons, down from 10.18 million in February but up from 9.22 million in March last year, while South Korea's arrivals are forecast at 6.12 million in March, up from 5.05 million for the same month in 2025.
CHINA, INDIA
It's also worth noting that the world's two largest coal importers, China and India, don't usually engage in gas-to-coal switching for power generation.
China's gas-fired generation is a tiny 3% of total electricity production, while coal is just under 60%. For India, natural gas accounts for about 2.8% of electricity generation and coal is around 70%.
While high LNG prices will likely curb imports in both China and India, it's unlikely to result in higher coal imports as rising domestic production will be able to compensate.
This dynamic can be seen in the prices of seaborne coal grades favoured by China and India.
Australian coal with an energy content of 5,500 kcal/kg, which is popular with Chinese utilities and Indian industrial users such as sponge iron producers, rose a modest 1.4% in the week to March 6 to $87.87 a ton, according to Argus.
Indonesian coal with an energy content of 4,200 kcal/kg performed better, rising 5.1% to $58.21 a ton in the week to March 6, but this was still well below the gain for higher-quality grades.
(Reuters)