Over the course of the second half of December 2009 and into January 2010, the northern hemisphere has been faced by an extreme cold snap. Much of Europe has been blanketed in snow, Beijing saw its heaviest snowfall since 1951 and countries on similar latitudes have been uniformly cold. With everyone rushing to turn up the heating, one might expect the extra electricity needs to stimulate greater thermal coal imports to service additional demand.

Why So Cold…?

The period of cold weather has been caused by low pressure at mid-latitudes and high pressure at the arctic, as measured by the Arctic Oscillation index. Monthly average values for this are shown in the top graph, with negative values implying cold winter weather around the 40th degree of latitude. As the Graph of the Month shows, the index moved strongly to the negative in December, to -3.4, the lowest value recorded since the early 1980s. Daily observations have stayed at similar levels through January.

It was a White Christmas…

Of course, electricity usage is driven by far more factors than just homeowners turning up their central heating. Heavy industry is a significant user of electricity, particularly in the processes by which aluminium and cement are manufactured. The global economic crisis caused a significant drop in electricity usage producing a consequent rapid fall in coal prices in late 2008, as shown in the bottom graph.

Whilst global demand for thermal coal was strong during 2003-08 (with a CAGR of 5.6%) coal prices were relatively steady at high levels. Prices ex-Richards Bay eventually began to rise and peaked at around $167/t FOB in July 2008 when the supply/demand balance became tightest as a result of lack of investment in supply-side infrastructure.

Since the economic crisis, thermal coal demand in all countries (bar China, South Korea and India) has fallen back to low levels. Electricity generation from coal in Europe is estimated to have been 5% down by mid-2009 on a year earlier, and coal prices followed accordingly.

…for Coal Shippers

During 2003-08, whilst demand was strong from all end-users of the electricity sector, the minor fluctuations in home usage had little impact on pricing. However, since the economic crisis, the impact of the extreme weather evident by the sudden swing in the ‘Arctic Oscillation’ appears to have had a disproportionate effect. In tandem with December’s sudden temperature low, coal prices ex-Richards Bay have moved sharply upwards in response to the cold snap. Chinese prices are also reported to be up, due to the snow generating extra demand whilst also disrupting mining in Shanxi province (and inventories have fallen accordingly). So, in times of global recession, it appears that thermal coal demand is not just influenced by the economic health of a region. Other factors, including the weather, must be considered.