Newcastle thermal coal to average around $320/tonne in 2022: Fitch Solutions

August 10, 2022 (MLN): In the backdrop of Russia's willingness to restrict pipeline gas deliveries to Europe which has accelerated European demand for gas and coal from other suppliers, that would further increase the price of Newcastle thermal coal to average around $320/tonne in 2022, the latest report issued by Fitch Solutions unveiled.

While in the long run the coal prices to average $246/tonne over 2022-2026. 

In its short-term outlook, the report said, “We expect coal demand to be stronger than we had previously anticipated and this is the reason for our higher price forecast. The main driver of high thermal coal prices since Russia's invasion of Ukraine in February 2022 has been a rapid diversification of European energy demand away from Russian gas and coal, with a resulting increase in demand for gas and coal from other suppliers.”

As infrastructure bottlenecks have prevented Russia from fully diverting coal and gas exports to markets outside of Europe, the effect has been to reduce the amount of gas and coal available on the global market, it added.

The report further considers it unlikely that Russia will fully cut gas supplies to Europe in Winter 2022/2023. Nonetheless, reduced deliveries of gas from Russia to Germany via the Nord Stream I pipeline over July have shown that Russia is more willing to use gas exports as a political weapon than Fitch Solutions had previously anticipated.

Russia provided 40% of the bloc's natural gas supply over 2021 and soaring regional energy prices will continue to drive policy revision across much of the EU with the aim of aggressively diversifying away from the Russian energy supply.

Accordingly, the report expects energy security and independence initiatives to counter Russia will rise rapidly and take center stage on a policy front in the region.

Meanwhile, the EU Commission will continue to enable increased power generation from coal in the bloc over 2022 and 2023, which will temporarily reverse the long-term decline in coal consumption in Europe.

Discussing the long-term outlook, the report anticipated that Newcastle thermal coal prices to average $246/tonne over 2022-2026 compared to the previous forecast of USD159/tonne.

Coal demand growth will be far stronger in the coming years as a result of the Russia-Ukraine war and the related pivot by the EU away from Russian energy supplies. The EU will double down on alternatives to coal power generation in the coming years, as illustrated by the new EU policy, RE-Power EU, which will front-load funding from the European Green Deal to accelerate growth in renewable energy generation.

Through the legislation, the European Commission aims to increase the renewable energy target from 40% to 45% by 2030, the report added.

However, such large-scale investments will take many quarters to complete and, in the meantime, coal power generation will help to fill some of the gap left by reduced imports of Russian gas.

Even in the unlikely event of a rapid de-escalation of the Russia-Ukraine conflict, the report expects that policy direction in the EU is now firmly set on greater energy independence from Russia. Even though the report has significantly increased price forecasts, it still continues to believe that the long-term trend in thermal coal prices will be lower.

On the demand side, the rapid expansion of renewable and potentially nuclear power capacity in the EU will allow for renewed reductions in coal use. More generally, the COP-26 summit in Glasgow in 2021 suggests that global coal-fired power generation will peak by 2030 and decline steadily over the following decade.

On the supply side, the surge in coal prices to multi-year highs will result in stronger investment in mine supply globally. Stronger coal production in China and India, in particular, will reduce coal import requirements in these two countries.

Already, coal production in both China and India surged to record levels during the first half of 2022. Production in China increased by 12.5% YoY over January-June, while production in India rose by 13.5% over January-May.

While coal-fired power had already been facing increasing headwinds in recent years, the COP26 agreement made a direct call for markets to reduce their reliance on coal-fired power for the first time, it noted.

Several notable coal-heavy markets such as Indonesia and Vietnam also made commitments to end the construction of new coal-fired power plants, following announcements made by Pakistan and the Philippines over the past year as well. This also comes as coal financing grows increasingly strained, with commitments from most major banks and financial institutions to end the funding of coal at COP26, it added.

Discussing the significant upside risks to the price outlook, the report underlined that Indonesia’s government implemented a coal export ban on January 1st in order to ensure a sufficient supply for domestic power plants.

Although the relaxation of Indonesia’s coal export ban in mid-January will help meet strong demand for thermal coal during the first half of 2022, persistently high international prices mean there is a significant risk of renewed curbs on exports from the country, which would push up international prices further.

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