Geopolitical tensions between the U.S. and Iran, which risk blocking the Strait of Hormuz, are once again threatening global energy supplies, prompting markets to reassess the strategic value of coal as a substitute for oil and natural gas.
In a sector report dated March 9, Founders Securities analyzed several decades of historical events—including the Iran-Iraq War, the 2011 Arab Spring, two rounds of sanctions against Iran, and the 2022 Russia-Ukraine conflict—and found no uniform pattern. In some periods, coal prices surged alongside oil and gas; in others, they declined. The key determinants, according to the report, are the starting price level of coal and whether power generation gaps emerge due to natural gas shortages.
The transmission of oil and gas price increases to coal occurs mainly through two channels: coal-based chemical production and coal-fired power generation. Currently, the ratio of Australian coal prices to Brent crude stands at approximately 1.66, near the 56th percentile historically. During geopolitical conflicts, the coal-to-oil price ratio often trends upward, reflecting coal’s relatively inelastic supply-demand balance and notable price volatility.
Although European coal prices have not yet shown significant increases at the onset of recent tensions, expectations of tightening oil and gas supplies are gradually affecting coal markets. Founders Securities suggests that if the Strait of Hormuz remains blocked for an extended period or even becomes a permanent risk, the overall price floor for coal could rise, reinforcing its role as a stabilizing force in the energy mix.
Historical patterns show that geopolitical conflicts in the Middle East and Europe have repeatedly driven up energy prices. The Iran-Iraq War (1980–1988) serves as an early example. The outbreak of war, combined with the second oil crisis, led to attacks on oil facilities and tankers, severely disrupting shipping through the Strait of Hormuz. International oil prices surged from USD 13 per barrel in 1978 to around USD 40 per barrel in 1980, a jump of over 200%. European natural gas prices rose from USD 2.3 per MMBtu to USD 4.2 per MMBtu. Driven by soaring oil and gas prices, demand for alternative energy shifted to coal, pushing the Newcastle thermal coal FOB price from USD 28 per ton in early 1978 to USD 45 per ton by late 1980, a 61% increase.
During the Arab Spring in 2011, civil wars in key oil-producing countries such as Libya and Syria disrupted oil and gas supplies. According to BP data, Libya’s crude oil output fell sharply from 1.74 million barrels per day in 2010 to 512,000 barrels per day in 2011. The annual average price of Brent crude exceeded USD 111 per barrel, up 38% year-on-year. At the same time, flooding in Australia constrained coal supplies, driving prices at Europe’s ARA port above USD 131 per ton, with an annual average of USD 121 per ton, a 32% increase.
The reimposition of U.S. sanctions on Iran in 2018 also lifted energy prices across the board. That year, Brent crude rose 31%, natural gas prices increased 34.4%, and Newcastle coal prices climbed 21.3%. Notably, during the 2012 Iran nuclear crisis, coal prices actually declined by 16.7% year-on-year due to a high baseline, underscoring the importance of the starting price level in determining upward potential.
The Russia-Ukraine conflict in 2022 delivered the most severe energy shock in recent memory. Russia had been Europe’s largest energy supplier, providing 52% of the EU’s coal imports and 44% of its natural gas imports in 2021. After the conflict began, Europe banned Russian coal and sought alternatives to Russian gas. The sabotage of the Nord Stream 2 pipeline further tightened gas supplies, prompting a large-scale shift to coal power. A global scramble for coal pushed Newcastle thermal coal prices to a peak of USD 453 per ton, with the full-year 2022 average up 123% year-on-year.
Founders Securities explains that oil and gas prices influence coal through two primary mechanisms: substitution in chemical production and power generation. In the coal-chemical pathway, olefins can be produced via either petroleum-based or coal-based processes. In China, for example, producing one ton of olefins requires about five tons of coal. When Brent crude is at USD 60 per barrel, the corresponding olefin production cost is approximately CNY 6,800–6,900 per ton, close to the cost using coal priced at CNY 778 per ton for 5500K grade. If oil rises to USD 85 per barrel, the breakeven coal price would be around CNY 1,285 per ton. With oil currently near USD 90 per barrel and coal prices still relatively low, sustained high oil prices could boost demand for coal-based chemicals, supporting higher coal prices.
Historically, the coal-to-oil price ratio has tended to rise during energy price spikes driven by geopolitical conflicts, except during 2011–2012 when coal prices started from an elevated base. This pattern arises because countries generally maintain substantial commercial and strategic petroleum reserves, which can be released to stabilize oil markets, whereas coal stockpiling systems are less developed. Moreover, coal demand is heavily tied to power generation, where supply-demand balances are relatively inflexible, giving coal greater price volatility than crude oil.
In the power generation substitution channel, the recent U.S.-Iran tensions have already impacted gas markets. On March 2, QatarEnergy announced the suspension of LNG production at two facilities following drone attacks, driving up European gas prices. Qatar accounts for roughly 20% of global LNG exports. If LNG carriers are unable to transit the Strait of Hormuz, a global LNG shortfall could recur. The 2022 Russia-Ukraine conflict demonstrated that when gas shortages raise power generation costs, demand for coal-fired generation rises rapidly, pulling coal prices higher alongside gas.
The report notes that Iran’s minimal coal output means the conflict has little direct effect on global coal supply, which is why coal prices initially remained stable and European prices saw only modest gains. The real risk lies in the spillover effects of a blocked Strait of Hormuz, which handles about 30% of seaborne crude oil trade and 20% of LNG trade. A prolonged LNG disruption would likely trigger a global shortage. If such supply shocks coincide with extended blockade conditions, the substitution effect in power generation would intensify.
On the chemicals side, Iran’s energy and petrochemical footprint is substantial: it produces 5.06 million barrels of crude per day (5.2% of global output) and 262.9 billion cubic meters of natural gas (6.4% of global output) as of 2024. Due to limited LNG infrastructure, less than 5% of its gas production is exported. Iran also has 17.39 million tons of methanol production capacity, accounting for 59.78% of the Middle East’s total. These factors mean that volatility in oil, gas, and chemical prices will amplify substitution demand in both coal-chemical and coal-power sectors.
The duration of any Strait of Hormuz blockade is critical. A short-lived disruption would lift oil and gas risk premiums more sharply, generating only temporary coal substitution demand with limited price upside. A prolonged or permanent blockade, however, would keep oil and gas supplies tight, raising gas-fired power costs and boosting coal-power demand, while high oil prices improve the economics of coal-based chemicals. Combined with restructuring energy trade flows and higher shipping costs, this scenario would likely raise the entire coal price curve and reinforce coal’s role as an energy stabilizer.
Companies with strong exposure to coal price volatility may benefit from rising substitution demand, while coal-chemical producers could see improved profitability if oil and gas prices remain elevated.
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