CME Group, the world’s largest futures exchange operator, said rising coal and natural gas prices are expected to have a profound impact on consumers, as higher energy bills and manufacturing costs push inflation rates higher globally.
The elevated prices of coal and gas will also hasten the shift towards renewable energy.
Supply chain bottlenecks and rising energy costs have kept the US headline inflation rate at more than 5 per cent for four straight months, but it could soon be a global phenomenon, according to Erik Norland, executive director and senior economist at CME Group.
“The risk over the next few months is that the inflation that we’ve seen rising in the United States might begin to rise in other countries,” said Norland during a media briefing on Tuesday. “We’ve seen a tremendous rise in the price of coal, and we’ve also seen a tremendous rise in the price of natural gas, so the risk is that it begins to push electricity prices a great deal higher around Asia, [where] it could also really impact manufacturing.”
Erik Norland, executive director and senior economist at CME Group, pictured in December 2018. Photo: Xiaomei Chen
Thermal coal futures traded on the Zhengzhou Commodity Exchange rose 8 per cent to 1,692 yuan (US$264.7) a tonne last Friday, the biggest weekly rise on record since they began trading in 2013 and have nearly tripled in price since the beginning of this year. Prices of imported liquefied natural gas have also almost doubled year to date.
On average, natural gas accounted for about 3 per cent of the cost of a manufactured good before prices went up, according to Norland. With gas prices tripling, that cost could expand to around 12 per cent, and drive up the cost of electricity to 14 per cent of the production cost of manufactured goods, from 7 per cent previously.
China and India rely heavily on coal, which accounted for about 60 per cent and 70 per cent, respectively, of their electricity generation in 2020. If electricity prices double or triple, that could easily add 7 to 14 per cent to the cost of manufactured goods in Asia, CME estimated.
“It [higher coal, natural gas and oil prices] is going to put a lot of upward pressure on the aspect of consumer price inflation, both directly from consumers’ energy bills, and indirectly through higher costs for manufactured goods and even agricultural products,” said Norland.
The recent shortage of coal in China has led to industrial and residential power rationing in more than 20 provinces since September. Several factors have led to the coal shortages, according to analysts, including a surge in power demand after the Covid-19 pandemic, low stocks and supply disruption due to extreme weather in the country’s largest coal mining province Shanxi.
The National Development and Reform Commission (NDRC), China’s top economic planner, said on Tuesday it was looking to intervene and bring record high coal prices back down to a “reasonable range”. This caused China’s coal futures to fall 8 per cent to their downward limit in night trading after the announcement, the steepest plunge since August.
Norland expected the coal shortage-driven inflation to last for six months or a year at most, and expected coal inventories to eventually recover and prices to moderate.
“I don’t think this is a problem that’s gonna last forever, but it will probably incentivise the energy transition,” he said.
“I think a lot of countries are looking at this and saying that we have to diversify into more wind power and solar power. The good news there is that solar power and wind power costs continue to come down every single year.”Internet Explorer Channel Network