March 22, 2023 - 

Coal prices have been retreating from their highs in 2022 but they remain well above the 2017-2021 average. Global coal consumption levels reached an all-time high in 2022, led by India and China.  On the supply side, increased exports by countries such as South Africa and Colombia—whose combined share in total European imports has been 35% since August 2022—have partially offset the reduction of Russian exports to Europe. Prices are expected to be lower in 2023 (on average) compared to 2022 but remain high by historical standards. Possible supply redirection from the ongoing Russian invasion of Ukraine and a faster-than-expected pace of China’s reopening could impact the outlook of falling prices.

Coal prices started to decline in the second half of 2022, although they remain much higher than their 5-year average. The Australian and South African benchmark prices have fallen by about 50% from their peaks in September and April 2022, respectively, due to increased production and warmer weather. The gap between the two benchmarks, which had been caused by supply disruptions in Australia due to the tropical cyclone season and the limited ability of Asian utilities to switch away from high-grade Australian coal to low-grade alternatives, has almost disappeared.

Global demand reached an all-time high in 2022. Consumption rose strongly in India (10%) and in Europe (5%) in response to electricity generating facilities substituting away from natural gas and filling the supply gap created by weaker production from other sources, including nuclear and hydro. Consumption in China rose modestly, as economic growth remained sluggish due to COVID-19 restrictions. On the other hand, coal consumption in the United States decreased by 8% in 2022Q4 due to less significant natural gas price increases compared to Europe. This limited the substitution between coal and gas for electricity generation in the U.S.

Global production reached an all-time high in 2022. China increased output by 11% compared to 2021, while production in India rose by 16%. In the United States, coal production increased by 3% in 2022, despite the decrease in domestic consumption and logistic constraints. In Indonesia, production has increased to 4% above its annual target. On the other hand, production in South Africa has decreased due to labor and rail transport constraints.

Reduced Russian coal exports to Europe were balanced by increases from Colombia and South Africa. Exports from South Africa to Europe experienced an almost six-fold increase, while exports from the U.S. have remained broadly stable in 2022 (although some were redirected to Europe). Russian exports, which increased overall, have been redirected to China and India, following the EU ban of Russian coal in 2022Q3. Indonesian exports rose 14% in 2022 and reached an all-time high despite two temporary export bans.

Both coal prices and demand are expected to decline in the medium term. Average annual coal prices are forecast to decrease in 2023 compared to 2022 but remain well above their five-year average.  Coal futures prices are also considerably lower in 2023 compared to 2022. Declining coal prices could, however, be hindered by further trade diversions,  which would increase transport costs, and by gas price increases that could affect the price of coal due to the substitution between the two fuels, especially in the power sector. Expected short-term increases in coal demand could be compromised by economic takeoff in China failing to materialize and slower-than-expected global growth. In the longer term, the geopolitical risks from the invasion of Ukraine have increased governments’ determination to facilitate energy transition away from fossil fuels. This translates into expectations that global coal demand will peak in 2023 and plateau thereafter.