Coal continues to be the predominant fuel for electricity generation worldwide, and a main source for global energy supply. Coal generates today over 41% of the world’s electricity and while its growth has slowed as it is losing market share to natural gas, coal consumption is still expected to grow at 0.5% per annum over the next 20 years. A lack of integration in the world’s coal market has seen it divided for a number of years into the Atlantic and Pacific regions, in particular because of the cost of bunker fuel compared to the value of the coal being transported.

The Pacific region has been playing a more important role in the physical coal trade in recent years, with the growing importance of India and China on the demand side and Indonesia on the supply side.

In parallel, the shale explosion in the oil and gas industry in the United States had a fundamental impact on the American coal market, and will continue to do so independently of the government views as long as US natural gas prices remain extremely low. In this context, one of key questions is to ask whether the Pacific and Atlantic regions are still divided.

US Energy transition from Coal to Gas
US Energy transition from Coal to Gas

Coal market integration?

In two early studies in 2006, Ekawan and Duchêne describe the hard coal markets in the Atlantic and Pacific regions respectively, and allude to the integration between the two markets, without empirically testing the hypothesis.

In that year, Wårell examined whether the European and Japanese markets were integrated between 1980–2000 for both the steam coal and coking coal markets. For steam coal, the result supported the hypothesis of an integrated market. In order to test market integration over time, the author also applied co-integration tests to two sub-periods, the 1980s and the 1990s and concluded that no integration could be confirmed for the 1990s.

Li et al in 2010 investigated the hypothesis of a single economic market for the international steam coal industry. Using multiple methods, they conclude that, in general, the international steam coal market could be seen as integrated over that time period. Zaklan, in 2012, add the logistics perspective and concluded that there was a significant, yet incomplete, integration.

Papież and Śmiech (2013) use instead a causality methodology to investigate the international steam coal market integration, especially dependencies between different markets. They analysed weekly export and import data in seven markets (Indonesia, Australia, Japan, Korea, Netherlands, South Africa and Colombia) from 2002 to 2011. They concluded that the most important factor in the Pacific market was Australian coal; while in the Atlantic market, ARA and Richard Bay prices had the biggest influence on other prices—results which confirm the role of Australia and South Africa as a major producing country in each region.

The most recent work, published late last year by Liu and Geman, revisited the integration of the world coal market and undertook a statistical analysis of ten indexes related to ten important, importer and exporter countries, over the past decade.

Surprisingly, their empirical tests showed that China does not belong to  the global market, probably because of its large production and national policies. For the US, the Principal Component Analysis (PCA) shows a deviation from the other eight markets, while co integration tests provide evidence of integration with the other eight markets.

Their proposed explanation for this contradiction is the central location of the US between the Atlantic and Pacific oceans and the existence of futures contracts on the US index. The PCA also shows that the other eight markets are integrated as a global system.

The separation between the traditional Atlantic and Pacific basins is visible in the PCA only when the less important third components are displayed. Co-integration tests lay some support to this conclusion: there are several cross-regional co-integrated pairs (South Africa to India for example) and that multiple tests also confirm that the global system is integrated.

Energy growth projection for Asia and market integration
Energy growth projection for Asia

Coal focus moves East

They also argued that the major coal markets are moving East and provided three supporting pieces of evidence:

  1. By reporting the remarkable reversal in 2015 of the lead/lag relationship between six pairs of major indexes;
  2. By analysing the dramatic demise of the four leading US coal miners as evidenced by the behaviour of their share prices from 2013-2016. Their collapse was partially due to the emissions reduction policy of the previous administration, but primarily to the gigantic production of shale gas and the replacement of thermal coal by cheap natural gas in the production of electricity;
  3. By describing the actual and forecasts of coal consumption across the world


Southeast Asian countries including Malaysia, Thailand and Vietnam are seen as growth markets for the consumption of imported thermal coal as coal-fired electricity is used to fuel their fast-growing economies.

Eight of the most populous countries are in Asia, and with 54% of the world’s population live now living in the continent, the growing demand for energy will inevitably be focused on this part of the world. As global coal markets continue to integrate and as political, economic and environmental legislation continues to push the West away from Coal, Asia will certainly be of key importance to coal miners, shippers and generators

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  2. World coal markets: Still weakly integrated and moving east –

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