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Thermal coal prices could fall further from around their four-year low, said analysts, as surging production in China leads to a glut across global markets.
Benchmark prices for seaborne thermal coal, which is used in power stations to generate electricity, have tumbled to one-quarter of their peak levels in 2022, when Russia’s invasion of Ukraine sparked an energy crisis and a huge bull market in coal.
A prolonged period of high prices in 2022 and 2023 — from which some miners and hedge funds were able to reap large profits — drove a surge in production, with China, India and Indonesia opening new mines in recent years.
Domestic output in China, the world’s biggest producer and consumer of thermal coal, has been at record levels so far this year, which has led to a drop in the amount it needs to import. High inventory levels in China and in India, the world’s second-largest coal user, have also contributed to the sluggish market.
The spring and autumn months, known as “shoulder season”, are often weak for the seaborne coal market, because peak demand occurs during the northern hemisphere’s summer months, when China and India switch on air conditioning units.
This year, analysts expect coal prices to slip further from their current levels because of the amount of supply on the market, before recovering during the second half of the year as summer demand kicks in.
“There is not too much price support at the moment,” said Firat Ergene, an analyst at Kpler. “Even if prices were lower, no one is going to buy more coal,” he said, pointing to existing high inventory levels.
Most of the world’s thermal coal is mined domestically and used in the same country where it is produced — only about one-tenth is shipped internationally on the seaborne market.
Global coal demand has risen steadily in recent years, despite the sector being shunned by some environmentally-minded investors, reaching a new record last year, due to growing demand from power stations.
The biggest coal exporters include Indonesia, Australia, South Africa and Colombia. They have been particularly hard hit by the downturn, as European countries try to wean themselves off coal.
Alex Thackrah, an analyst at Argus, also expects prices to fall further before recovering during the third quarter of this year.
“Supply is responding to the current [low] prices,” he said, pointing to recent production cuts in Colombia by miners Glencore and Drummond.
However, Tom Price, an analyst at Panmure Liberum, expects high demand to support prices during the summer months.
“I’m not expecting shock and awe moves,” said Price. “But we are right at the start of the restock before the summer peak.”
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