Analysing the Volatility of Coal Prices: Why they Spike in Fall
Coal prices have a tendency to peak in the fall. A variety of factors contribute to this phenomenon. Understanding the underlying causes of this can help inform policy decisions and investment strategies related to coal.
A major factor that affects coal prices is the seasonal demand for energy. As the weather gets colder in the fall, there is an increase in demand for heating which in turn leads to an increase in demand for coal as a fuel source. The increase in demand drives up the price of coal. For example, in the United States, coal consumption for electricity generation tends to increase during winter months as the demand for heating increases. Historical data shows coal prices tend to increase in the months of October and November, as the weather gets colder.
Another factor that contributes to the higher coal prices in autumn is the timing of industrial production. Many industries, such as steel and aluminium sectors, have a seasonal cycle where production increases in the fall. Higher production levels lead to an increase in demand for coal, which drives up prices. For example, in China, a major consumer of coal, steel production typically increases in the fall as demand for construction materials increases. This increased demand for coal can be seen in the historical data, with coal prices tending to increase in the months of September and October, when industrial production increases.
Additionally, supply-side factors also play a role in the peak in coal prices in the fall. For example, in some regions, fall is the time when mines are closed for maintenance and this reduces the supply of coal. This then contributes to higher prices. Furthermore, natural disasters such as floods and typhoons can disrupt coal mining operations, leading to a temporary shortage, again driving prices higher. Among the most important, and also potentially the most overlooked is the nature of monsoon rains in India, and their subsequent effects on the supply of coal. India is second largest producer and consumer of coal in the world after China, with production being 778 million tonnes and consumption being 1052 million tonnes; with it seeming to increase for the short term (till 2030) peaking at about 1192-1325 million tonnes. Coal is a critical fuel source for the country's power plants, factories, and households, accounting for over half the country’s energy needs. The monsoon season typically occurs between June and September and often has major impacts on coal production and transportation. For instance, the Piparwar Area in 2019, which is known for its overwhelming share of coal mining in the country, was hit by severe flooding causing a halt in production, leading to supply crunches. In areas where mines are located near rivers, the monsoon rains can cause flash floods that then completely inundate the mines, making it impossible to extract coal. In addition, the heavy rainfall can cause landslides and washouts along transportation routes, making it difficult to transport coal from mines to power plants, ports, and other destinations.
In conclusion, the peak in coal prices in the fall is the result of a combination of factors such as seasonal demand, industrial production cycles, and supply-side constraints. By analysing historical trajectories, one can assess the impact each of these factors have had to drive the fall peak in coal prices over time. This knowledge can help inform policy decisions, investment strategies related to coal and can also be used to predict future price trends.