The shale drilling boom and subsequent glut didn’t just send the price of oil and gas plummeting. Since 2014, the value of coal and coal mining companies plunged so low on low coal prices that even one of coal’s largest companies, Peabody Energy, was forced into bankruptcy.
According to data from the EIA, coal consumption has fallen substantially, in both absolute and relative terms.
Between 1997 and 2015, coal gave up a large percentage of its share of total electricity generation to natural gas as the competing fossil fuel proved to be a cheaper, cleaner alternative in many parts of the U.S.
But Chinese government’s attempts to reduce overcapacity in its coal industry has pushed coal prices far higher than anticipated giving coal an impressive rally in recent months. As moves to reduce output proved to be too successful, Chinese output dropped and caused coal prices to almost double since the start of 2016.
With Chinese regulators referring to the surge as “irrational”, it is likely only a matter of time before their response to the irrationality causes another price shift. Companies like China Shenhua Energy Co. and BHP Billiton Ltd. have already issued statements indicating they see thermal coal prices pulling back as regulators take action.
On the fundamental level, the coal price upswing appears to be a temporary shock caused by state interference in the world’s largest coal consumer with no real change in supply and demand trends. So long as Chinese regulators make good on their promise to address the overshooting of their goal, coal should settle back into its downward spiral in the coming months.