terracom train, page-99

An interest of mine has been trying to determine the relationship between natural gas prices and coal prices. I see that there is a war going on at the moment. The war is between coal and natural gas as to what will be the dominant fossil fuel used for energy in the future. NG appears to be winning that battle in the US. I believe there are three reasons for this.

1. Economic, they have access to cheap NG from the Permian Basin
2. Political i.e the climate hustle.
3. Related to point 2, when subsidising and implementing unreliable wind and solar you need power plants that can rapidly adjust to supply constraints. Natural gas plants are better suited to this than coal and nuclear.

I believe Asia to be more pragmatic in the short to medium term and specifically Japan must be out of necessity due to its under abundance of resources.

Two sets of data that I have found that look to most accurately represent my theory are below. I will use the JKM index as that is the Japan and Korea index and also two of Terracom's largest export markets. My theory is Terracom coal pricing should be influenced most by the JKM NG index. From what I can see the JKM NG import price and the Australian export coal price are highly correlated. The price relationship (with some exceptions during COVID) looks to be about 10x the JKM import price per MMBTU. i.e A JKM import price of $10 MMBTU equates to a $100/t export price for Australian coal. Unfortunately I don't have access to the raw data to plot this myself.

Current futures for JKM NG prices are sitting above $10 until Mar 2022. If this price holds then we should see sustained export coal prices.

Correlation does not prove causation and of course predicting the future is impossible but there seems to be a nice 10x relationship, from I can see, between JKM and Australian coal prices.