Thermal coal prices likely to weaken on surge in Chinese output, imports

Thermal coal prices are likely to rule weak for the remainder of the year and in 2024 in view of oversupply in the Chinese market owing to increased domestic production and  surge in its imports.

The World Bank Commodity Outlook said Australian coal prices fell by 8 per cent quarter-on-quarter in the third quarter of 2023, following a 31 per cent drop in the second half, with South African coal prices changing similarly. “The conflict in the Middle East has led to a modest uptick in coal prices,” it said.  

The Australian Office of Chief Economist said after an extraordinary spike in 2022, thermal coal prices fell back sharply in the first half of 2023, but have since stabilised, with prices for higher grade coal lifting slightly in recent weeks. 

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Price forecast

“As global supply recovers, the Newcastle benchmark price (6,000 kcal) is forecast to decline from almost US$180 a tonne over 2023,” it said.

Currently, Newcastle are ruling at $122 a tonne, far lower than $380 seen at the beginning of the year. 

“We maintain our Newcastle thermal coal price forecasts for 2023 and 2024 at averages of $180/tonne and $170, respectively,” said Research agency BMI, a unit of Fitch Solutions. Global demand for coal remains weak alongside buoyant market supply and US dollar strength, it said.

 “China has boosted coal production since the 2021 power crisis to prevent a repeat, and this year’s production is on track to set a new record. The situation has been further exacerbated by a 73 per cent increase in coal imports during the first nine months of the year, driven by more affordable global supplies,” said the Trading Economics website.

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Factors for price dip

The World Bank Commodity Outlook said several factors have contributed to the drop in prices. “The most important were fuel substitution—related to declining natural gas prices and high EU Emissions Trading System (ETS) allowance prices—and high levels of storage, particularly in Europe,” it said. 

Increasing supply in all major producers and higher levels of exports from Indonesia also helped reduce market prices, the outlook said. 

Trading Economics said as a result, the coal market has shifted from a situation of scarcity a few years ago, which led to widespread power shortages, to a scenario where ample coal supplies are available.

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The Australian Chief Economist Office said price growth in the second half of 2023 is possible, with recent growth in gas prices improving the competitiveness of thermal coal, particularly in the Asian region. “The northern winter could also add an upside to thermal coal demand towards the end of 2023, though inventories (especially in Europe) remain strong,” it said.

Long term prospects

BMI said while its forecast for 2023 marks a significant departure from the annual average of $358/tonne reached in 2022, it remains markedly higher than price levels before the Russian invasion of Ukraine in February 2022.

“In the longer term, we expect prices to continue easing as the global economy progresses on its shift away from energy derived from fossil fuels,” it said.

Global production slowed in the first half of 2023 after growing by 8 per cent in 2022 in response to soaring prices after the Russian invasion of Ukraine. Output in China and India increased in but at a lower rate than in 2022, the World Bank Commodity Outlook said. 

“Assuming the conflict in the Middle East does not escalate, coal prices are forecast to fall 49 per cent in 2023, 26 per cent in 2024, and 15 per cent in 2025, but remain well above the 2015-19 average,” it said. 

Upside risks

The forecast assumes that recent consumption growth will moderate in 2024 and 2025, with smaller increases in China and India and larger declines in the US and the EU, the Outlook said. 

The Australian Chief Economist Office said most factors point to a decline in prices after 2023. “Supply has not yet fully recovered from La Niña disruptions, and there is capacity to bring additional supply into markets over coming months,” it said. 

However, the World Bank’s Commodity Outlook said in the short term, coal prices are subject to various upside risks. “An escalation of the (Israel-Hamas) conflict could push up coal prices if natural gas prices are subject to a spike.

In addition, weather disruptions, such as heat waves and droughts induced by El Niño, represent another upside risk. These can increase power demand while reducing the contribution of hydropower,” it cautioned.