Introduction
Following demand and supply mismatches in the energy market, the prices of natural gas, oil and coal surged in 2021. This is causing large disruptions and intensifying the effects of the rising inflation. High energy prices can also have important implications for domestic and industrial consumption, highlighting the potential repercussions on global supply chains. The energy crisis has been especially severe in China, pivotal in the supply of countless products.
Following demand and supply mismatches in the energy market, the prices of natural gas, oil and coal surged in 2021. This is causing large disruptions and intensifying the effects of the rising inflation. High energy prices can also have important implications for domestic and industrial consumption, highlighting the potential repercussions on global supply chains. The energy crisis has been especially severe in China, pivotal in the supply of countless products.
Energy Market Recap and Outlook
Energy prices surged during the third quarter of 2021 after the world economies emerged from the pandemic with increasing demand and rising inflation in a year disrupted by mercurial weather conditions that dramatically affected the available stock of these commodities.
These include oil products, coal, natural gas needed to produce the electricity consumed by households and firms.
For instance, natural gas prices in the UK – one of the most affected markets – rose by 293% year-to-date and Brent prices – a quality of oil extracted in four different areas of the North Sea – are up 65% in the same period. Coal, the most fossil fuel damaging for the environment, is trading at $230 per ton, up 186% from the beginning of the year.
The soar in energy prices questions central banks’ statements about an only temporary inflation and could turn out to be detrimental for the growth of energy-importing countries. This has already taken place in Japan, with the Yen value vis-à-vis the dollar declining in recent months amid capital flight from the country due to its energy-importing status. Another factor that needs to be considered is the spike in volatility of these commodities, which has multiple drawbacks for the international supply chains.
Furthermore, energy products are often key inputs for the production of other commodities and their rising prices already negatively impacted the production of food crops and certain metals such as zinc and aluminum.
The World Bank forecasts energy prices to remain high during the first half of 2022 before declining due to the easing of supply constraints. What is likely is that the surge in the volatility of these commodities may complicate policy concerns about inflation. It is probable that natural gas and coal prices will decline in the second half of 2022 as a result of global growth softening, whereas oil might benefit from its use as an alternative to natural gas to maintain momentum until the end of 2022, with the World Bank forecasting an average price of $74 per barrel as opposed to an average of $70 in 2021.
Energy prices surged during the third quarter of 2021 after the world economies emerged from the pandemic with increasing demand and rising inflation in a year disrupted by mercurial weather conditions that dramatically affected the available stock of these commodities.
These include oil products, coal, natural gas needed to produce the electricity consumed by households and firms.
For instance, natural gas prices in the UK – one of the most affected markets – rose by 293% year-to-date and Brent prices – a quality of oil extracted in four different areas of the North Sea – are up 65% in the same period. Coal, the most fossil fuel damaging for the environment, is trading at $230 per ton, up 186% from the beginning of the year.
The soar in energy prices questions central banks’ statements about an only temporary inflation and could turn out to be detrimental for the growth of energy-importing countries. This has already taken place in Japan, with the Yen value vis-à-vis the dollar declining in recent months amid capital flight from the country due to its energy-importing status. Another factor that needs to be considered is the spike in volatility of these commodities, which has multiple drawbacks for the international supply chains.
Furthermore, energy products are often key inputs for the production of other commodities and their rising prices already negatively impacted the production of food crops and certain metals such as zinc and aluminum.
- The spike in coal prices has been largely driven by supply constraints and rebounding demand after the pandemic. China – the biggest producer of coal – pledged earlier this year to move away from coal towards other cheaper and more sustainable fossil fuels. However, the recent geological disasters in the north Shanxi province (a major coal production base in the country) drastically cut the available stock of coal, hampering the production of electricity and leading to blackouts in multiple Chinese cities. In addition, energy suppliers that are experiencing rising cost of inputs are often unable to pass on the extra cost to consumers due to energy price caps and the tightly regulated nature of the direct-to-consumer energy market. This made it financially unviable to operate many coal-fired power plants and further contributed to the supply shortage.
- As for natural gas prices in Europe and Asia, they skyrocketed this year due to various reasons. First, last year’s colder and longer-than-expected winter demanded a high amount of gas channeled into home heating purposes and wiped-out inventories. Then, slow wind speeds and dry conditions limited the supply of energy from renewable sources. Lastly, Russia – a major natural gas exporter - shrank the supply through its pipelines to Europe and Asia.
- Oil benefited from a spillover effect of the gas crunch as energy importers turned to this fossil fuel in order to keep their plants running. The rebound of economies from the pandemic also played a role in increasing oil demand. In addition, the Opec+ group (Organization of the Petroleum Exporting Countries and Russia) recently declined to accelerate the return of crude production to pre-pandemic levels in order to incentivize investments in oil and gas production. These factors contributed to the surge of prices to multi year highs.
The World Bank forecasts energy prices to remain high during the first half of 2022 before declining due to the easing of supply constraints. What is likely is that the surge in the volatility of these commodities may complicate policy concerns about inflation. It is probable that natural gas and coal prices will decline in the second half of 2022 as a result of global growth softening, whereas oil might benefit from its use as an alternative to natural gas to maintain momentum until the end of 2022, with the World Bank forecasting an average price of $74 per barrel as opposed to an average of $70 in 2021.
Focus on China
Focusing on the China market, the recent energy crisis is a significant cause of concern for analysts that forecast high energy prices and continued disruptions throughout the year. Several factors contributed to the current state of the largest coal producer and consumer. In an ambitious attempt to significantly reduce carbon emissions, the Government imposed energy consumption restrictions on provinces, especially for aluminium, cement, and steel-intensive sectors, and initiated a process of closure of coal mines for environmental motives, switching to renewable resources such as solar, hydro and wind power.
As a result, companies started reducing operations to comply with the restrictions. This had immediate repercussions for industries relying on China’s exports of key resources in a time of increased consumer demand following the pandemic shutdowns. The tech sector was particularly impacted, with companies such as Apple, Dell, and Sony relying on crucial material including chips produced by Ase Technology Holding and assembly services provided by Pegatron. Moreover, the increased coal prices driven by the reduced supply, rendered the business of coal-fired energy producers unprofitable, leading to additional shortages and blackouts.
Thermal coal prices traded on the Zhengzhou Commodity Exchange increased 60% reaching 1,408.20 yuan ($218.77) per tonne, triggering a response of the Government that intervened in October to mitigate the damaging effects of the energy crisis. Premier Han Zhang urged state-owned energy coal mines to increase supply and allowed energy producers to raise prices in some instances to meet winter demand “at all costs”, complementing it with imports of natural gas, contributing to an increase in the prices of crude oil and LPG, already fuelled by the recovered car and airplane travel. Following the government statement, the production of the largest coal miner and energy producer China Energy Group increased by 2.26 M tonnes, 7.5% more than the 2020 October supply.
Despite this first government response, the situation did not resume. The attempt to increase supply was hampered by floods in the coal-producing region of Shanxi, unexpected weather, and the continued unprofitability of the coal-fired energy production business. The energy shortage and the consequent blackouts persisted, and as Chinese thermal coal futures continued to rise in the week of the 11th of October, reaching a record weekly gain, market expectations remained pessimistic, anticipating disruptions throughout the winter, and posing questions on whether firms will transfer the increased cost of production to consumers. Furthermore, soared energy prices are expected to negatively affect the already suffering Chinese property development sector, which will face increased construction costs.
Notwithstanding a reduction in the price of the January thermal coal on the Zhengzhou Commodity Exchange that started on the 19th that fell by the maximum 14% to 1,365 yuan ($213) per tonne on the 21st , these negative prospects remain because of the extremely high prices compared to the previous year. This sudden reduction was triggered by the statement of China's National Development and Reform Commission, that announced on the 19th of October potential additional state intervention in the supervision of coal supply, distribution, and price stabilisation as well as the securities regulator urging futures exchanges to raise transaction fees for thermal coal futures contracts and to restrict trading quotas, to return to “reasonable” price levels.
On the 25th of October, the NDRC declared it will verify the reliability and transparency of the data provided by the energy price index providers, which according to the commission caused coal prices to deviate from fundamentals at the expense of public interest.
Focusing on the China market, the recent energy crisis is a significant cause of concern for analysts that forecast high energy prices and continued disruptions throughout the year. Several factors contributed to the current state of the largest coal producer and consumer. In an ambitious attempt to significantly reduce carbon emissions, the Government imposed energy consumption restrictions on provinces, especially for aluminium, cement, and steel-intensive sectors, and initiated a process of closure of coal mines for environmental motives, switching to renewable resources such as solar, hydro and wind power.
As a result, companies started reducing operations to comply with the restrictions. This had immediate repercussions for industries relying on China’s exports of key resources in a time of increased consumer demand following the pandemic shutdowns. The tech sector was particularly impacted, with companies such as Apple, Dell, and Sony relying on crucial material including chips produced by Ase Technology Holding and assembly services provided by Pegatron. Moreover, the increased coal prices driven by the reduced supply, rendered the business of coal-fired energy producers unprofitable, leading to additional shortages and blackouts.
Thermal coal prices traded on the Zhengzhou Commodity Exchange increased 60% reaching 1,408.20 yuan ($218.77) per tonne, triggering a response of the Government that intervened in October to mitigate the damaging effects of the energy crisis. Premier Han Zhang urged state-owned energy coal mines to increase supply and allowed energy producers to raise prices in some instances to meet winter demand “at all costs”, complementing it with imports of natural gas, contributing to an increase in the prices of crude oil and LPG, already fuelled by the recovered car and airplane travel. Following the government statement, the production of the largest coal miner and energy producer China Energy Group increased by 2.26 M tonnes, 7.5% more than the 2020 October supply.
Despite this first government response, the situation did not resume. The attempt to increase supply was hampered by floods in the coal-producing region of Shanxi, unexpected weather, and the continued unprofitability of the coal-fired energy production business. The energy shortage and the consequent blackouts persisted, and as Chinese thermal coal futures continued to rise in the week of the 11th of October, reaching a record weekly gain, market expectations remained pessimistic, anticipating disruptions throughout the winter, and posing questions on whether firms will transfer the increased cost of production to consumers. Furthermore, soared energy prices are expected to negatively affect the already suffering Chinese property development sector, which will face increased construction costs.
Notwithstanding a reduction in the price of the January thermal coal on the Zhengzhou Commodity Exchange that started on the 19th that fell by the maximum 14% to 1,365 yuan ($213) per tonne on the 21st , these negative prospects remain because of the extremely high prices compared to the previous year. This sudden reduction was triggered by the statement of China's National Development and Reform Commission, that announced on the 19th of October potential additional state intervention in the supervision of coal supply, distribution, and price stabilisation as well as the securities regulator urging futures exchanges to raise transaction fees for thermal coal futures contracts and to restrict trading quotas, to return to “reasonable” price levels.
On the 25th of October, the NDRC declared it will verify the reliability and transparency of the data provided by the energy price index providers, which according to the commission caused coal prices to deviate from fundamentals at the expense of public interest.
Conclusion
Following demand and supply mismatches in the energy market as well as restrictive environmental policies around the world, the prices of natural gas, oil and coal surged in 2021, causing large disruptions and intensifying the effects of the rising inflation. Analysts warned against the implications for domestic and industrial consumption, highlighting the potential repercussions on global supply chains.
The energy crisis was especially severe in China, the most significant coal producer and consumer, due to a combination of unavailability of supplies and green policies limiting the use of coal.
Notwithstanding prompt government interventions, high prices and volatility of these commodities are expected to remain until 2022 around the world.
Following demand and supply mismatches in the energy market as well as restrictive environmental policies around the world, the prices of natural gas, oil and coal surged in 2021, causing large disruptions and intensifying the effects of the rising inflation. Analysts warned against the implications for domestic and industrial consumption, highlighting the potential repercussions on global supply chains.
The energy crisis was especially severe in China, the most significant coal producer and consumer, due to a combination of unavailability of supplies and green policies limiting the use of coal.
Notwithstanding prompt government interventions, high prices and volatility of these commodities are expected to remain until 2022 around the world.
Miriam Franceschinelli
Federico Panariello
Federico Panariello
Sources
- tradingeconomics.com
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