HomeCoalCoal snapshot: Mid-term outlook is positive

Coal snapshot: Mid-term outlook is positive

While there is a concerted effort by nations to reduce reliance on coal for both energy and production purposes, research analyst Fitch Ratings believes that the medium-term outlook for the commodity remains buoyant. GERARD PETER reports.


There can be no doubt that the coronavirus pandemic has had an effect on global demand for both thermal and metallurgical (met) coal. According to Fitch, thermal coal prices had been exceptionally low, around US$49/t in August and September 2020 for the Newcastle 6 000 kilocalories grade, making 60 – 70% of global seaborne coal suppliers unprofitable and prompting production cuts. For the most part, the decrease in demand for thermal coal was driven by China.


However, according to Jenny Huang, director of Fitch’s China Corporate Research team, the demand is likely to improve in 2021 following a very sluggish 2020. This demand will mainly be driven by a resurgence in the global economy, particularly in Asia

“On the supply side, the extremely low prices last year have not been profitable for global suppliers, forcing some of them to cut production, especially in the second half of 2020. Hence, the overall inventory level has been low, thus contributing to a price rebound this year,” Huang explains.


That said, Huang doesn’t expect the recent surge in the coal price to be sustainable. This is largely driven by China’s relaxation on import restrictions to help ease supply tightness in the local market as well as an unusually cold winter in North Asia that boosts heating demand. The long-term outlook, however, remains bearish amid China’s and India’s intentions to increase domestic production, as well as the increasing share of renewable energy in the global energy mix.

Meanwhile, while many countries have pledged to achieve carbon neutrality around 2050, Fitch believes that these climate change pledges are unlikely to materialise in the next three to five years. For example, China’s ambition to reduce its reliance on overseas markets in its 14th Five-Year Plan period (2021 – 2025) suggests sufficient coal supply will be an important national security consideration as the country is short of most other types of primary energy. Japan has also yet to provide a clear roadmap amid challenges to restart nuclear reactors. That said, new coal projects may still struggle to access external financing.

Weighing in on the conversation, Oliver Schuh, senior director of natural resources for Fitch’s Europe, Middle East and Africa region, states that while many parts of the world have moved away from coal as an energy source, China still requires coal for energy intensive production processing.

“70% Of thermal coal around the world is used for electricity generation while 11% is used for cement production and 19.2% used by other industries and a lot of these industries are in China,” he adds.

Regarding emerging markets, Schuh states that there is no sign that thermal coal will be phased out in the near to mid future and suggests that a longer term approach will be needed.

“When it comes to the energy transition, you have followers and laggers, so some countries are more ahead with fulfilling their climate change pledges than others. For example, China is a bit slow but that is because of its economic development plans that energy demand is increasing significantly. As such, you cannot accelerate as quickly with decarbonisation as other countries are doing.”

Regarding Africa, Schuh explains that because the continent has a considerable amount of coal reserves and still relies heavily on thermal coal as an energy source, it will take much longer to phase out.

Met coal outlook

Up until 2019, met coal prices hovered around the $200/t price. Prices in 2H20 came down to USD140-150/t linked to US-China trade tensions, weak demand in some regions, robust production in China and port restrictions in China on coal intakes.

The COVID-19 pandemic and associated weaker demand in the wake of capacity curtailments in many regions led to a decline in prices to $106/tonne by August 2020, with prices having recovered since to levels around $150/tonne in February 2021.   

That said, Fitch expects met coal demand to slowly improve in 2021 as ex-China steel production recovers. China was the most active buyer on the global seaborne market in 2020, but Fitch expects that steel production in China reached a high in 2020. Steel output in India has rebounded strongly since the first round of lockdowns were lifted and it is expected to reach pre-pandemic levels in 2021.

Additional hard coking coal (HCC) demand in the next five years will come from India, south-east Asia and Latin America. Total HCC consumption may not return to pre-pandemic levels until 2023.

Steel producers in north-east Asia were the most affected by the pandemic, with around 20% of capacities remaining idled as of February 2021. Most furnaces in Europe have restarted, with around 4% remaining curtailed. The second wave of lockdowns does not restrict industrial activity so have less of an impact on steel demand than it did in H1, 2020.  

In addition, Schuh states that Fitch’s conservative medium term price prediction is  $140 Mt  once the supply/demand dynamic normalises. It is also expected that global met coal imports will increase by 44 Mt in 2024 from 2020 levels. According to the CRU Group, a more realistic prediction of the price is between $150 to $160 for 2022 to 2025.

Schuh expects the transition to low-carbon steelmaking to affect HCC demand only in the longer term.

“Currently, there are no substitutes for met coal in the steel production process and while steel producers are looking at technologies such as hydrogen in the steel making process, right now there are no choices to substitute met coal over a ten-year horizon, maybe not even over 15 years,” he concludes.

Gerard Peter
Gerard Peter is a content creator and media strategist with more than 23 years' experience in new and traditional media.