The Trade Numerologist: The coal conundrum

After enduring a rough decade, the global coal trade has appeared to be back from the dead in 2017.

The world's dirtiest fuel is continuously assailed by politicians, environmentalists, and regulators. Most major U.S. coal miners have filed for bankruptcy this decade. Global coal production fell to 7.3 billion tons in 2016, down 6.3% from the year before.

But this is also true: It's plentiful, and relatively easy and cheap to dig and burn. That's why coal still accounts for 40% of global electricity supply, and is still used for making steel in integrated blast furnace mills.

And when there's a supply crisis, it's the emergency supply. Railroads, rivers and ports are still geared up to ship coal from mine to plant. And leaders in fast-growing, power-hungry developing countries are glad they can turn on the faucet.

That's what happened this year. Asia went through a dry spell. China's hydroelectric dams didn't have enough water. In addition, Beijing has been reducing its own production and trying to shut inefficient mines.

So when the rains stopped, power supply ran low. And orders were put in for more black rock to be dug up, from Australia to West Virginia. China's imports, for example, increased a whopping 123%, to $9.5 billion from $4.3 billion during the first six months of 2016.

Top importers of coal, first six months of 2017 (and increase)

That forced up coal's value. The upshot was a boom in coal prices, and shipping rates. The resurgence has helped the Baltic Dry Index climb above 1,300 points, up from under 900 points a year ago.

The countries benefiting from this rebound are coal powerhouses like Australia and Indonesia, and also, surprisingly, the U.S. American coal exports almost doubled to $4.9 billion in the first six months of 2017. Mainly mined from basins in Illinois, Appalachia and Wyoming, U.S. coal mainly goes to Brazil, India, Japan, South Korea and the EU. In countries like Germany and the UK, mines have been shut down, but power plants still need coal. And thanks to investments in wind and solar energy that have decreased carbon emissions, there's room to burn some of America's dirtiest coal.

Top coal exporters of coal, first six months of 2017 (and increase)

It would be a mistake to take this year's surge as a demonstration of coal's permanent return. Instead, say analysts, it's an example of the rock's growing volatility.

Total global coal imports, 2011-2016

The reason is mainly the regulatory uncertainty surrounding the coal sector. While politicians like to castigate coal, they also need to keep the lights on. In the U.S., for example, in 2040, production is expected to range between 620 million shorts tons and 850 million short tons, depending whether the Clean Power Plan is implemented. No other fuel source has such a wide divergence of possible outcomes.

Global coal output is expected to increase by only 0.6% a year between 2015 and 2021, according to a recent report by the International Energy Agency.

The best example of why you should hedge your bets on coal is India. The country has been ramping up coal imports, but now is trying to reduce those shipments to zero, in a bid to switch to other forms of energy and boost domestic suppliers. So after more than doubling this decade, Indian coal imports have fallen back.

India coal imports, 2011-2016

And even after offering a lifeline to coal miners, traders and shipping lines around the world, China is likely to cut imports. In early October, one of China's biggest industrial cities, Taiyuan, in northern Shanxi province, banned the transport, sale and use of coal, in an effort to reduce air pollution.

The Trade Numerologist is IHS Markit's unique weekly look at global trade by award-winning journalist John W. Miller, formerly of the Wall Street Journal, using proprietary numbers from IHS Markit's Global Trade Atlas database, the world's most complete and accurate set of trade numbers.