Global Thermal Coal Prices Surge Due to Rising Demand and Natural Gas Prices - UBS Analysts Predict Stabilization
In recent months, global thermal coal prices have experienced a significant increase, driven by factors such as rising energy prices and heightened cooling demand during a heatwave. However, analysts at UBS foresee this surge as temporary, with prices expected to stabilize or even decrease as coal supply rises and seasonal demand subsides.
Late August 2024 saw a spike in European and Asian coal prices, with European thermal coal prices (API2) jumping by $20 per ton to over $120 per ton, and Asian seaborne prices (Newcastle coal) climbing by $10 per ton to $145 per ton. This upward trend can be attributed to the parallel increase in natural gas prices, as both European TTF gas prices and Asian JKM gas prices have surged.
The demand for cooling amid the heatwave in the Northern Hemisphere, particularly in Asia, along with expectations of a halt in Russian gas exports to Europe, have bolstered gas prices. This, in turn, has supported the rise in coal prices, especially in Asia where coal is a cheaper alternative to natural gas.
Despite global initiatives to reduce coal consumption, worldwide coal usage hit a record high in 2023, driven by heightened demand in China and India. These regions have offset the declines in coal consumption seen in the United States and Europe. Coal remains a crucial component of the energy sector in regions where it is abundant and more cost-effective than other fossil fuels.
The Asia-Pacific region remains the focal point for global coal production and consumption, with China and India driving the majority of demand. Chinese coal production hit new highs in July 2024, reflecting a strategic effort by domestic producers to compensate for earlier output slowdowns. As Chinese coal production continues to rise, the market is expected to be better supplied, potentially easing price pressures.
UBS analysts anticipate a decrease in thermal coal prices in the coming months as summer demand wanes. The increase in Chinese coal production is expected to help balance the global coal market, potentially reducing global coal prices. The shift towards renewable energy, particularly hydropower, in China may also limit the growth in coal demand, gradually diminishing coal's significance in the energy mix.
Overall, the recent surge in coal prices is seen as temporary by UBS analysts, with forecasts suggesting a drop to around $125 per metric ton in the near future due to increased coal supply and decreasing seasonal demand. This analysis provides insights into the current state of the global coal market and its potential impact on consumers and investors worldwide.