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, taking into account 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 to improve market supply, 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 would 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.

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 expected thermal coal to average $60/t over the period 2022 to 2030.

This compared 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 forecast global consumption to contract by 0.4% this year, following a 4.6% decline in 2020.

Modest average yearly growth of 1.5% over the period 2022 to 2025 should then be followed by stagnation and eventual decline towards the end of the decade, the firm said, although it noted that, ultimately, it expected 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 would 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 period 2021 to 2030, compared with more modest demand growth of just 0.4%.

This, according to the firm, should result in growing yearly thermal coal surpluses that would ultimately drag prices lower.

Reduced import demand from the two largest coal consumers, 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 a gradual increase in the number of banks reviewing their coal-fired power project financing strategies. Second, public opposition to coal projects would increase project realisation risk, and third, increasing consumer focus on 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 slowed 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 would steadily decline in the coming years, Fitch Solutions said it expected 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 expected 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 expects coal’s share of global electricity generation to decline to 29.4% by 2030 from an estimated 35.1% in 2020.