Fitch Solutions Country Risk and Industry expects thermal coal prices to peak during the third quarter of this year and then weaken “substantially” by the end of the year.
In spite of this forecast, the research firm increased its average price forecast for the year to $85/t, up from $72/t previously, to account for stronger-than-anticipated prices over the year-to-date. This new forecast implies an average price of $82/t over the remainder of the year, compared with the year-to-date average of $88/t.
Over the coming months, Fitch Solutions said on July 22, three factors would ease the scarcity that had developed in the global seaborne coal market. First, the extreme heat that boosted electricity consumption in parts of China during June and July should abate, which the firm said “will lower coal prices in the world’s largest consumer”.
Fitch Solutions also expects the Chinese government to continue releasing coal from strategic stockpiles onto the domestic market in order to weaken prices. The National Development and Reform Commission (NDRC) announced on July 15 that it would release ten-million tonnes of coal in order to improve market supply, the agency referenced, adding that this compared with three batches of five-million tonnes released earlier in the year.
This, it added, “indicates that the [Chinese] government is increasingly determined to drive down coal costs for utility firms and, thus, power costs for consumers”.
Third, Fitch Solutions said the surge in prices in September would encourage global production that was taken offline during the year to partially come back online.
In China, which accounted for about half of global coal production in 2020, this will be supported by a government request that miners start to maximise production.
Elsewhere, reduced disruption to mining operations from the Covid-19 pandemic would allow production to increase in India and Russia, the firm noted.
The long-term outlook, however, is for lower coal prices.
“Ultimately, we expect that environmental policy will result in coal demand growth weakening more rapidly than production growth,” Fitch Solutions said in a July 22 statement.
An increasingly well supplied seaborne market should result in global prices edging lower over the remainder of the decade, the firm said, noting that it forecasts thermal coal to average at $60/t over the 2022 to 2030 period.
This compares with $85/t this year and an average of $79.40/t over the previous five years, Fitch Solutions said.
Consumption growth, meanwhile, would weaken after a near-term recovery from the Covid-19 pandemic, the firm further said, adding that it forecasts global consumption to contract by 0.4% this year following a 4.6% decline in 2020.
A modest average yearly growth of 1.5% over the 2022 to 2025 period should then be followed by stagnation and eventual decline towards the end of the decade, the firm said, though it noted that, ultimately, it expects environmental policy to drive a steady decline in yearly coal consumption outside Asia, with growth in Asian demand also set to slow towards 2030.
The net result should be peak global consumption of thermal coal by the end of the decade.
Weak production growth will be sufficient to outstrip consumption, and Fitch Solutions forecasts global thermal coal production to grow at a yearly average rate of 1.6% over the 2021 to 2030 period, compared with more modest demand growth of just 0.4%.
This, according to the firm, should result in growing yearly surpluses of thermal coal that will ultimately drag prices lower.
Reduced import demand from the two largest consumers of coal, China and India, would more than offset declining export supply from producers such as Indonesia and the US.
Several factors would, ultimately, lead to peak global thermal coal consumption by the end of the decade. First, international and domestic pressure would lead to the gradual increase in the number of banks reviewing their coal-fired power project financing strategies.
Second, public opposition to coal projects would raise project realisation risks, and third, an increasing consumer focus toward environmental policy would encourage utility firms to more closely align their commercial investments with climate change goals.
Finally, Fitch Solutions noted that, as power demand growth in the largest consuming emerging economies gradually slows towards the end of the decade, governments would be better placed to restrict coal-fired power expansion without risking the security of domestic power supply.
However, the pace of decline in coal consumption should not be exaggerated. While coal's share of total electricity generation capacity will steadily decline in the coming years, Fitch Solutions expects coal to remain the dominant source of electrical power.
“Even as international financing for coal-fired power projects deteriorates, we believe that funding from Chinese and South Korean banks will remain largely forthcoming. Both countries aim to generate external demand for coal power equipment through the use of their respective export credit agencies, amid domestic declines in coal-fired power generation,” the firm commented.
It added that the modest recovery in global coal consumption that it forecasts over the coming years would be driven by a pipeline of coal-fired power plants in Asia that would push up yearly global consumption by an additional 305-million tonnes to 6.5-billion tonnes by 2028 compared with 2020.
Fitch Solutions forecasts coal's share of global electricity generation to decline to 29.4% by 2030 from an estimated 35.1% in 2020.
Asia, meanwhile, would likely increasingly be the centre of global coal trade, as coal would remain the dominant source of power for most of Southeast Asia and Australia in the coming decade at least, which would support the mining of coal and coal trade in the region.
Coal remains the most practical means to stimulate affordable electricity generation growth at the pace and scale needed to support continued economic growth in the region.
Nevertheless, Fitch Solutions noted that stricter environmental standards in Asia would continue to hurt coal miners by increasing compliance costs and delaying project development.
Reducing carbon footprints has gained significant impetus since 2020, with the shift to the low-carbon economy to have a significant impact on the regulatory frameworks of most major mining markets in Southeast Asia and Australia as governments commit to their Nationally Determined Contributions under the Paris Agreement.
Asia Pacific governments will face considerable challenges on this front, Fitch said, where major mining countries, including Indonesia and Australia, will remain largely reliant on fossil fuels (primarily coal) for energy generation.
Indonesia and Australia would be the leaders of coal production in absolute terms, along with a high percentage of coal-fired power in the countries’ power mix. Vietnam’s coal production would be particularly strong, albeit small compared with that of Indonesia and Australia, while Thailand and Myanmar would remain coal mining laggards.
Malaysia and Cambodia would continue relying on coal imports, with weak growth for domestic coal mining, Fitch Solutions said.