Coal supply, seasonally weaker demand should see prices level off

Investing.com — Global thermal coal prices have skyrocketed in recent months, driven by factors like rising natural gas prices and increased cooling demand during a scorching heatwave. 

However, analysts at UBS predict that this price surge is temporary. As coal supply increases and seasonal demand cools down, prices are likely to stabilize or even decrease.

European and Asian coal prices have increased in late August 2024. European thermal coal prices (API2) have risen by approximately $20 per ton to over $120 per ton, while Asian seaborne prices (Newcastle coal) have climbed by about $10 per ton to $145 per ton. 

This upward trend is largely due to a corresponding increase in natural gas prices. Both European TTF gas prices and Asian JKM gas prices have surged, contributing to the higher coal prices.

“Gas prices have been bolstered by expectations that Russian gas exports through Ukraine to Europe will end this year, as well as by increased demand for cooling amid the heat wave across the Northern Hemisphere, particularly in Asia,” said analysts at UBS.

“The latter has also supported coal, which is cheaper than natural gas in Asia,” the analysts said.

Despite global efforts to reduce coal consumption, the reality is that worldwide coal use has actually increased to a new record high in 2023. 

This surge is mainly driven by increased demand in China and India, which has more than offset declines in the United States and Europe. 

Coal continues to be a vital part of the energy landscape in many regions, especially where it is plentiful and more affordable compared to other fossil fuels.

Coal supply has also seen a notable increase in 2023, with about 80% of global coal production and consumption concentrated in the Asia-Pacific region. China, which accounts for 56% of global coal consumption, and India, with 13%, have continued to drive global demand. 

Chinese coal production has reached new seasonal highs, with July 2024 production hitting 390 million metric tons, up from 378 million metric tons in July 2023 and 373 million metric tons in July 2022.

This increase in Chinese coal production is particularly significant as it reflects a strategic effort by domestic producers to make up for slower output earlier in the year, following the relaxation of stringent safety restrictions. 

As China’s coal production continues to rise, the market is expected to become better supplied, which could ease some of the pressure on prices.

UBS analysts forecast that the current high prices for thermal coal will likely decrease in the coming months. The increased demand for coal due to summer heat is expected to decline as the weather cools down. This should help lower the price of thermal coal.

China’s increasing coal production is expected to help balance the global coal market. As domestic supply grows, China may reduce its reliance on imported coal, potentially stabilizing or even lowering global coal prices. 

Additionally, the expanding use of renewable energy, especially hydropower, in China could limit the growth in coal demand. As China continues to invest in renewable energy, coal’s importance in its energy mix may gradually decrease.

UBS analysts believe that the recent increase in Newcastle coal prices is temporary. They predict that prices will fall to around $125 per metric ton in the next few months due to increased coal supply and decreasing seasonal demand.