Coal

Background:

Coal prices have been exceptionally volatile during 2008-2009 as current and expected demand for industrial energy slumped and recovered. Apparent volatility is amplified by the fact that most coal is sold on long-term contracts the pricing of which is not transparent, while the spot market is small and very sensitive to short-term supply and demand alterations. There is no single benchmark price for coal, which is produced in numerous grades depending on whether the application is in heavy industry, electricity generation or domestic heating. However exchange traded funds in physical coal provide an approximation to a composite commodity price: these show average coal prices bottoming in December 2008, since when they have risen around 300%. Most analysts expect coal prices to continue to rise in the longer term as world electricity demand increases.

Despite its environmental cost the use of coal is increasing rapidly worldwide. This fossil fuel is found in many regions of the world; Australia, South Africa and Indonesia are the largest exporters. In most economies coal is the cheapest available fuel for power generation, and emerging economies that are rapidly extending their power infrastructure are engaged in expansion of their coal-fired power networks and steel production capacity. The world currently consumes about 5.3 billion metric tons of coal annually, three-quarters of which is used to produce electricity (China, for example, produces 80% of its electricity from coal). However, coal is inefficient: the most efficient coal-fired generators capture only 35% of the total heat emitted by coal, the balance being emitted as waste heat and unburned gas and particles. Long-term demand for coal will therefore be partly determined by the intensity of future CO2 and other emissions levies.