Ernie Thrasher speaks with IHS Markit Vice Chairman Daniel Yergin for a new edition of CERAWeek Conversations – available at https://ondemand.ceraweek.com/cwc

High demand from a global economy “juiced up” on government stimuli and a reckoning with curtailed investment in supply has led to soaring coal prices that one “would have never envisioned,” says Ernie Thrasher, CEO and Chief Marketing Officer of XCoal Energy and Resources in a new episode of CERAWeek Conversations.

In a conversation with Daniel Yergin, vice chairman, IHS Markit (NYSE: INFO), Thrasher diagnoses the drivers behind the surge in coal prices, the outlook for the industry and the practical realities facing plans for a rapid energy transition.

“We have strong demand and the supply is not responding to the demand,” Thrasher says. “During COVID a lot of mining companies curtailed investments trying to save cash. And those companies are having the same experience as many other industries—challenges in bringing workers back to the work force.”

The supply challenge has been compounded by market distortions resulting from geopolitical tensions such as China unofficially banning coal imports from Australia, Thrasher says.

“Coal is finding a way to move, but a distorted market operates inefficiently,” he says. “We have U.S. coal going to China. We have Australian coal going to Europe. So, we effectively have ships crossing in the Indian or the Atlantic Ocean and that’s putting further strain on the availability of vessels to carry coal.”

Meanwhile, reduced output from renewable sources—particularly in Europe—is also factor, according to Thrasher.

“We’ve seen in the German power market in the last few weeks renewable power, which normally would contribute 55% of the German electricity mix only producing 35%,” he says. “So that void has to be filled by fossil fuels or other forms of energy and the Germans are turning to coal for that.”

The system is stretched to the point that shortfalls are possible, even in the United States, he warns.

“We’ve actually had discussions with power utilities who are concerned that they simply will have to implement blackouts this winter,” says Thrasher. “They don’t see where the fuel is coming from this winter to meet demand. It’s going to be a challenging winter for us here in the United States.”

Looking at the longer term, Thrasher says that the prospect of a rapid energy transition is “an aspiration and a goal that we should have,” but that “a dose of logic and reality is needed.”

“We’ve had since the Second World War a very reliable buildout of the electricity generating system in the grid. That’s 80 years ago. To think that we’re going to change that in a five or 10-year period I think is unachievable—physically unachievable,” he says.

The complete video is available at: https://ondemand.ceraweek.com/cwc

Podcast version available: CERAWeek Conversations is also available via audio podcast on Apple Podcasts, Google Podcasts, Soundcloud, Spotify and Stitcher.

Selected excerpts:

Interview Recorded Wednesday, September 29, 2021

(Edited slightly for brevity only)

• On the dynamics that have contributed to a sharp rise in global coal prices:
  
  
  
  “We’ve seen the convergence of supply disruptions that are due to a weak market going into COVID and then the effects of the COVID pandemic economically on energy companies and especially coal companies. We are experiencing a global economy that has been ‘juiced up’ by stimuli from various governments and central banks. I would have never envisioned coal prices being over $500 per ton.
  
  
  
  We basically are experiencing supply constraints. We have strong demand, and the supply is not responding to the demand. During COVID a lot of mining companies curtailed investments trying to save cash. And those companies are having the same experience as many other industries – challenges in bringing workers back to the work force. Simply operationally, when you curtail investment in a mining operation it takes an extended period of time to get back to a normal operation.”

• On the investment challenges facing the coal industry:
  
  
  
  “I think the system has peaked. It is difficult to get capital to expand a mining operation. Like many investments in mining, once you miss a capital expenditure program it’s very hard to go back and catch up again – mining moves on. Capital is definitely constrained. Not only capital for expansions but insurance and bonding are constrained. If you want to expand a mine and you need to increase the bonds to expand the mine, it’s very difficult to get bonding. I think the die has been cast and it’s hard to turn momentum back in a different direction.”
  
  
  
  “We’ve seen the divergence of the timeline for the aspirations of moving away from fossil fuels versus the evolution and development of renewable or alternate energy sources. We’re doing a much better job of closing coal fired power plants and reducing the use of coal than we are finding alternative sources of energy to replace that.”
  
  
  
  “The view that coal is a dying industry is somewhat premature. Certainly, in Asia coal is still the primary source of energy for electricity and other industrial uses and quite a large quantity of coal is used in the steelmaking process. We are quite some time away from replacing coal in the steelmaking process.”

• On geopolitical developments and distortions in the global coal market:
  
  
  
  “We not only have supply limitations, we have to get the coal from the mines to the port. We have to get vessels to take the coal from the port to the customer. That whole supply chain is stretched beyond its limits.”
  
  
  
  “We’ve seen the evidence of what happens when the blunt force of government policy gets imposed on the free market system. We had the U.S.-China trade dispute from 2018-2020. We had COVID and, starting in May 2020, it reached a peak in November 2020 when China unofficially banned the importation of Australian coal. There’s simply not enough coal in other parts of the world to replace the void left by the Australian coal not going to China.”
  
  
  
  “Coal is finding a way to move, but a distorted market operates inefficiently. We have U.S. coal going to China. We have Australian coal going to Europe. So, we effectively have ships crossing in the Indian or the Atlantic Ocean and that’s putting further strain on the availability of vessels to carry coal.”
  
  
  
  “The biggest issue [in Europe] is the reduced output of renewable power. We’ve seen in the German power market in the last few weeks renewable power, which normally would contribute 55% of the German electricity mix only producing 35-36%. So that void has to be filled by fossil fuels or other forms of energy and the Germans are turning to coal for that.”

• On market corrections for high coal prices:
  
  
  
  “The only foreseeable solution is if there is demand destruction, either through high prices or through government fiat or simply companies not having the wherewithal to buy the products they need at these prices. We’ve seen in China desire to decrease steel production to 2020 levels. If that happens that will reduce the demand for coking coal. I don’t think the Chinese are going to limit the use of electricity, but recently they’ve talked about raising the price of electricity to try to curb demand.”

• On surging energy demand and potential supply shortfalls:
  
  
  
  “Despite the fact that India has a huge domestic resource of approximately 600 million tons per year, most power plants in India today are operating at very low inventory levels. Coal demand is extremely strong in India for imported coal.”
  
  
  
  “In the U.S. what we’re seeing is very limited supply of coal, a supply chain that is stretched to or beyond its limits, and we’ve actually had discussions with power utilities who are concerned that they simply will have to implement blackouts this winter. They don’t see where the fuel is coming from this winter to meet demand. It’s going to be a challenging winter for us here. We know utilities today that are consuming gas even though it’s at a higher cost in order to build coal inventories for the winter. I’m very concerned. We’re going to have a very interesting COP26 in Glasgow when the world is in an energy crisis and we still have aspirations of reducing the use of fossil fuels before we have an alternative form of energy.”

• On practical realities of an energy transition:
  
  
  
  “We’ve had since the Second World War a very reliable buildout of the electricity generating system in the grid. That’s 80 years ago. To think that we’re going to change that in a five or 10-year period I think is unachievable – physically unachievable. It’s an aspiration and a goal that we should have, but it’s time for a dose of logic and reality. Until we have some kind of economical form of storage, the grid has to be stable every second of every hour of every day.
  
  
  
  “It’s not only sad, but it’s a travesty that people have suddenly accepted carbon capture and storage after hundreds of coal-fired power plants have been closed. Those plants would still be running today if we would have embraced and engaged in carbon capture and storage. It seems as if it’s okay for carbon capture and storage for gas and chemicals but it’s not okay for coal plants, which is a waste of financial investments and certainly it’s stranding a lot of energy.”

• On the future of the coal industry:
  
  
  
  “Technology is certainly going to have to continue to advance, but unfortunately, I think we’re past an inflection point for the coal industry. I believe the coal industry will reach an equilibrium point – 400 or 500 million tons in the U.S. – and that part of the industry will do well for a long period of time because there will be an amount of demand that is not replaceable in the short term. But the years of growing up in an industry where each year we added 3-4% production growth and demand growth are behind us and I don’t think they’ll ever come back.”
  
  
  
  “It’s a time that the industry needs to stand up and show that we are a solution to the energy needs. We’re not ready to throw in the towel yet. You have to keep the lights on. A utility has a responsibility to its customers and a government to its citizens to have electricity and a stable environment for society to live in. When the lights start flickering it will be a tough explanation.”

Watch the complete video at: https://ondemand.ceraweek.com/cwc

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About CERAWeek Conversations:

CERAWeek Conversations features original interviews and discussion with energy industry leaders, government officials and policymakers, leaders from the technology, financial and industrial communities—and energy technology innovators.

The series is produced by the team responsible for the world’s preeminent energy conference, CERAWeek by IHS Markit.

The complete episode library is available at https://ondemand.ceraweek.com/cwc.

CERAWeek Conversations is also available via audio podcast on Apple Podcasts, Google Podcasts, Soundcloud, Spotify and Stitcher.

About IHS Markit (www.ihsmarkit.com)

IHS Markit (NYSE: INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 business and government customers, including 80 percent of the Fortune Global 500 and the world’s leading financial institutions. Headquartered in London, IHS Markit is committed to sustainable, profitable growth.

IHS Markit is a registered trademark of IHS Markit Ltd. and/or its affiliates. All other company and product names may be trademarks of their respective owners © 2021 IHS Markit Ltd. All rights reserved.

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