Although coal prices are expected to remain volatile over the remaining quarter of 2021 and into the first quarter of 2022, financial risk management, solutions and insights company Fitch Solutions Country Risk and Industry Research (Fitch Solutions) has revised its 2021 average price forecast for Newcastle coal to $132/t, up from $85/t.
The firm explained that while prices have likely peaked, and will generally head lower over the coming months, the new forecast implies an average of $130/t over November and December.
Thermal coal prices spiked over June through to October as part of a surge in global energy prices, the main driver of which was generally a worsening energy crunch in China, which reached extreme levels in the third quarter of this year.
Fitch Solutions said it expects China’s energy shortage to ease during the country’s winter period and anticipates reduced coal imports into the country to contribute to weaker global thermal coal prices.
The firm further explained that Chinese thermal coal prices have collapsed from record highs posted in October alongside early signs that the power crunch in the county is abating, even as several provinces eased power rationing and lifted caps on power consumption in late-October.
The catalyst of this turnaround has been government intervention in the domestic coal mining and trading sector aimed at improving supply of coal and, more recently, as prices have started to fall Chinese coal traders have started to dump stocks to avoid losses and this has accelerated the price decline.
In spite of this, Fitch Solutions expects the Chinese government to continue to boost domestic availability of coal over the coming months, which it said should reduce import demand and depress seaborne coal prices.
China’s National Development and Reform Commission (NDRC) has announced a slew of measures to be undertaken and started enacting them since early October, with the latest being a crackdown on coal hoarding and speculative trades.
Among the NDRC's early measures was ordering coal mines to boost production with immediate effect despite cost implications. Since the end of September, the NDRC has also approved production at a number of previously shut coal mines, allowing a release of emergency reserve capacities.
Coal-fired power stations that had temporarily halted operations were also quickly restarted in China.
Fitch Solutions added that the Chinese government has mandated that local governments must maintain production at full capacity from coal mines during holidays and major events and they are forbidden from halting production without approval.
The country aims to increase coal mine production by 100-million tonnes in the fourth quarter of this year.
Overall, Fitch Solutions said China's power crisis had resulted from a confluence of factors. On the demand side, the ramp-up of industrial production since mid-2020 to aid in the country's Covid-19 recovery already ignited strong demand for power, especially since the start of this year.
On the supply side, weather issues like the low inflow of water into major river basins and less wind this year have posed difficulties for the generation of hydro and wind power, placing pressure on mainly coal power that is less weather-dependent.
However, Fitch Solutions said China's domestic production of coal declined month-on-month during the first half of this year and that total coal import quantity failed to meet the rise in demand.
Although Fitch Solutions believes the global energy crunch will fade as the world moves into 2022, the firm also expects that the impact on prices will take several years to completely fade.
As a result, it has revised up its price forecasts for 2022 to 2025 by an average of $17/t a year.
While the firm’s long-term coal price forecasts remain bearish, Fitch Solutions expects the pace of decline will be slower over the period than previously expected.