The world is in the grip of an energy crisis

While climate change and a need to phase out dirty coal were at the forefront of the global agenda all last year, weather woes this year, coupled with growing geopolitical tensions, have taken a toll on consumers. After the cold winter, the world now has to cope with extreme summer temperatures, adding to the energy crisis. More and more countries are stepping back from their push to scrap coal-fired power generation – at least for now. Some countries are creating new supply chains, while others, such as Poland,[1] are ramping up domestic production to weather the cold months. The problem for importers is exacerbated further by soaring coal prices, with thermal coal futures at Australia’s Newcastle port now trading at nearly $400 per tonne (see Fig. 1), while the spot price has already surpassed this mark.[2]

China has also been hit hard by the energy crisis. As it gradually lifts the lockdown, power demand is rising markedly, especially amid scorching heatwaves in the northern part of the country and heavy floods and rainfalls in the south.[3] China’s dependence on coal for power generation is still very strong: in the first five months of this year, coal accounted for as much as 63% of the country’s total energy consumption (see Fig. 2), though in previous years its dominance was even greater at 66% in 2021 and 67% in 2019. Note that power generation in the same period rose 2.7% y-o-y to 3,393 TWh. While in volume terms, coal imports in China dropped 13.8% y-o-y in January-May 2022, their value surged by a staggering 81.3% to $15.3 billion (see Fig. 3), prompting the government to cut import tariffs for all types of coal on 1 May in order to avoid supply disruptions.[4]

While the boost in domestic coal production, which rose 13% y-o-y in the first five months of 2022, was supposed to cater to the growing power demand, many experts argue that the quality of Chinese coal is going downhill.[5] With current price controls, local producers are now facing even tighter margins and have to turn to lower-grade coal.

As for the carbon footprint, we should brace for the worse. Soaring energy prices amid a shortage of alternative fuels infrastructure will certainly send shock waves across nearly all economies. Central banks are scrambling to contain inflation with interest rate hikes (for example, the Fed raised its benchmark rate by 75 b.p. to a range of 1.5%-1.75% in June). While these steps should keep a lid on demand, they might trigger another recession. But this topic deserves a separate discussion.