Australian thermal coal contracts, the benchmark for Asia, are hovering close to $100 a ton thanks to a mild winter and global oversupply, a price level last seen in May 2021, before the energy-market upheaval that followed Russia’s invasion of Ukraine. While that is battering producers and will cheer those predicting the end of the dirtiest fossil fuel, it’s a trough that may not last.
Investment in new production has dwindled in much of the world as shareholders and banks increasingly refuse to approve new spending on projects. Demand, however, continues to rise in India and China, outpacing breakneck rates of expansion in solar and wind, while even developed countries look to coal to help power the artificial intelligence boom.
The combination portends a sharp rebound for internationally traded coal that risks adding to the economic strain already being felt by households and manufacturers in emerging economies, still heavily dependent on the fuel. It could also make coal profitable for longer — potentially vindicating those who have bet on the fuel’s resilience while threatening climate targets.
“A lot of our minority joint venture partners around the world, more particularly in Australia, wanted to get out of steam coal,” Gary Nagle, chief executive officer of Glencore Plc said during an earnings call last month, explaining the commodities trader and miner’s commitment to the fuel and its move to buy out partners in recent years.
“At the time, coal was a four-letter word. It seems in today’s world, coal is no longer a four-letter word.”
The supply squeeze is not hard to explain. Banks have cut back on coal lending, either on ethical grounds or because of financiers’ concerns they’ll be funding assets that will be shut long before they can generate a profitable return. With scant new capacity coming in for seaborne coal — new mines tend to serve Indian or Chinese domestic demand — the market is looking tighter than many expected over the medium to long term.
Even lofty levels hit in 2022, after Russian tanks rolled into neighboring Ukraine and left Europe scrambling for alternative energy supplies, weren’t enough to prompt producers to build.
“In previous price highs, that would’ve stimulated or incentivized a lot of new projects,” said Steve Hulton, senior vice president of coal markets at Rystad Energy. “We haven’t seen any of that happen. And we saw more players took the opportunity to actually exit stakes.”
If anything, he said, miners have opted to buy existing capacity — but not to develop from scratch.
Worldwide, companies have proposed new projects that will supply about 1.8 billion metric tons per year of thermal coal to feed power plants — but 76% of that is in China and India. Of 70 nations tracked by Global Energy Monitor, only 10 have plans to boost output by more than 10 million tons. Most aren’t developing any new mines at all.
A dearth of supply, subsequent disruptions and extreme price strikes should accelerate demand destruction in price-sensitive markets — good news for the climate. But it also signals a turbulent endgame for coal, according to Rory Simington, an analyst at Wood Mackenzie Ltd., rather than a slow and steady decline.
The trouble is that while supply has been constrained, demand has kept rising, as millions more homes are electrified, cars are charged and factories are built. Surging green energy is reducing the need for fossil fuels — but not enough. In India alone, coal demand is expected to climb to 1.5 billion tons by the year through March 2030, according to estimates by the coal ministry, an increase of about 3% every year.
Tech companies are building data centers to support cloud computing and AI. Many utilities were caught flat-footed by this shift and are now relying more heavily on coal to keep enough juice flowing across the grid. In the US and Japan, they’re extending the life of plants that had been scheduled to close. Germany is hanging on to a fleet of mothballed coal plants because it’s taking longer than expected to build the new gas plants needed after the country closed its last nuclear facility in 2023.
No surprise then, that the International Energy Agency has revised its coal demand outlook higher in its last four annual reports — and has reversed its view that demand would peak. Global demand is slated to rise 1% through 2027, the organization said in a December report.
For now, there is little for producers to cheer. China, which mines and burns half the world’s coal, is facing swelling inventories since the start of last year after producers and power plants stocked up to avoid a repeat of the energy shortages that plagued the economy in 2021 and 2022.
Purchasing remained relatively strong through the end of the year as companies sought to cope with winter demand. But the season was mild and industrial power demand has slowed, leading stockpiles to bulge. Industry information provider China Coal Resource estimated total inventories rose to 665 million tons by the end of December, up 21% from the previous year and enough to supply the nation for more than a month.
China Shenhua Energy Co., a unit of the nation’s biggest coal firm, has stopped buying foreign coal shipments from the spot market as it seeks to draw down high port inventories and make use of domestic production. China’s largest coal associations have called for companies to adjust in order to prevent “severe” oversupply amid falling prices.
Japan and South Korea also had relatively normal winters, keeping North Asian demand in check.
“We had just come through a period where people were aggressively buying,” Wood Mackenzie’s Simington said. “Then we had a mild winter and now stockpiles are full everywhere.”
The lull looks likely to be short-lived. Hotter weather could quickly turn the picture as air conditioning fuels demand. And Chinese coal requirements continue inching higher, with the IEA expecting a 1.3% increase through 2027. The organization had previously expected China’s demand to peak in 2023.
As Newcastle coal prices have fallen, about 10% of export mines have become unprofitable at below $110 a ton, Simington said. Some of those mines will likely halt output, which should also provide temporary support for prices.
“Structurally there are pressures, no doubt about it,” Simington said. “But to date, the overall growth of energy demand has meant consumption of coal keeps being able to grow.”
