January 13, 2023 - Coal markets have been shaken severely in 2022, with traditional trade flows disrupted, prices soaring, and demand set to grow by 1.2%, reaching an all-time high and surpassing 8 billion tonnes for the first time.
In last year’s annual market report, Coal 2021, we said that global coal demand might well reach a new peak in 2022 or 2023 before plateauing thereafter.
Despite the global energy crisis, our overall outlook remains unchanged this year, as various factors are offsetting each other. Russia’s invasion of Ukraine has sharply altered the dynamics of coal trade, price levels, and supply and demand patterns in 2022.
Fossil fuel prices have risen substantially in 2022, with natural gas showing the sharpest increase. This has prompted a wave of fuel switching away from gas, pushing up demand for more price competitive options, including coal in some regions.
Nonetheless, higher coal prices, strong deployment of renewables and energy efficiency, and weakening global economic growth are tempering the increase in overall coal demand this year.
In China, which accounts for 53% of global coal consumption, prolonged and stringent Covid-19 lockdowns have weighed heavily on economic activity, undermining coal demand. At the same time, droughts, and heat waves in China this summer accelerated coal burning to meet a surge in power demand for air conditioning.
Coal used in electricity generation, the largest consuming sector, is expected to grow by just over 2% in 2022. By contrast, coal consumption in industry is expected to decline by over 1%, mainly driven by falling iron and steel production amid the economic crisis.
Global coal power generation rises to record levels
In 2022, high natural gas prices led to significant fuel switching to coal in electricity generation in Europe, although both gas and coal generation increased as the growth of wind and solar was insufficient to fully offset lower hydro and nuclear power output. In China, low hydropower output in the summer amid a big heat wave pushed coal power generation significantly higher.
In August, coal power generation in China increased by around 15% year-on-year to over 500 terawatt-hours (TWh). This monthly level of generation is higher than the total annual coal power generation of any other country, except India and the United States.
In India and China, where coal is the backbone of electricity systems and gas accounts for just a fraction of power generation, the impact of steeper gas prices on coal demand has been limited. Nevertheless, increased coal use in these countries has replaced some gas, which has been purchased by other regions willing to pay more for it.
Coal power generation will rise to a new record in 2022, surpassing its 2021 levels. This is driven by robust coal power growth in India and the European Union (EU) and by small increases in China – and it comes despite a decline in the United States.
Europe’s U-turn on coal is temporary
Europe – and the European Union in particular – has been one of the regions hardest hit by the energy crisis, given its reliance on Russian pipeline supplies of natural gas. Lower hydro and nuclear power output due to weather conditions, combined with technical problems in French nuclear power plants, put additional strains on the European electricity system.
In response, some European countries have increased their use of coal power generation while also accelerating the deployment of renewables and, in some cases, extending the lifetimes of nuclear plants.
Under the threat of gas shortages and potential issues ensuring sufficient power system adequacy, some coal plants that had closed or been left in reserve have re-entered the market. In most countries, this involved a limited amount of coal power capacity.
Only in Germany, with 10 gigawatts (GW), is the reversal at a significant scale. This has increased coal power generation in the European Union, which is expected to remain at these higher levels for some time. But redoubled efforts to improve energy efficiency and expand renewables will see EU coal generation and demand return to a downward trajectory as soon as 2024 in our forecast.
Global coal demand is set to plateau through 2025, but much depends on developments in China
In our forecast, global coal demand plateaus around the 2022 level of 8 billion tonnes through 2025. However, given the current energy crisis with all its uncertainties, a lurch into growth or contraction is possible. This could be driven by changes in global economic activity, weather conditions, fuel prices or government policies – among many other potential variables.
Developments in China may well have the largest impact on the outlook for global coal demand, since China accounts for more than half of it. China’s power sector alone accounts for one-third of global coal consumption. Coal consumption in China grew strongly in 2021, but growth is expected to remain relatively stagnant at an average of 0.7% a year to 2025, largely because of the increase in renewable power generation.
In the 2022-2025 period, we expect China’s renewable power generation to increase by almost 1 000 TWh, equivalent to the total power generation of Japan today.
Meanwhile, India’s coal consumption has doubled since 2007 at an annual growth rate of 6% – and it is set to continue to be the growth engine of global coal demand.
By contrast, coal use is forecast to maintain its downward trajectory in the United States, and to fall considerably in the European Union by 2025. At a global level, we expect new renewable generation to cover almost 90% of additional electricity demand through 2025.
With a modest increase in nuclear power generation and high gas prices prevailing, coal power generation increases slightly to 2025. Therefore, in the absence of low-emissions alternatives that can replace coal at scale in the iron and steel sector in the near term, global coal demand is set to remain flat through our forecast period.
An all-time high for coal production in 2022
China and India, the world’s largest coal consumers, are also the biggest producers and, in addition, the top two coal importers. In response to price rises and supply shortages, China and, to a lesser extent, India, pushed up domestic coal production after summer 2021.
In March 2022, Chinese production reached a new monthly high and it is set to rise to a new annual record, with expected growth of 8% for the full year, reducing the need for imports and replenishing stocks.
In India, the government has tried to increase production for a long time to reduce imports. In 2021, coal production reached 800 Mt for the first time. In our forecast, India’s production surpasses 1 billion tonnes by 2025.
Indonesia, the world’s third-largest producer, is also expected to expand production to reach a new high in 2022, with exports playing a more important role than domestic demand. With minor growth in the United States and even in Europe, global coal production will rise above 8 billion tonnes in 2022, its highest level ever.
International coal trade is reshuffling because of Russia sanctions
Russia’s invasion of Ukraine has triggered a series of bans and sanctions on Russia by many countries and companies. Russia is the third largest coal exporter in the world and the sanctions have as a result given rise to a reshuffling of global trade flows as buyers, especially in Europe, seek alternative supplies.
In addition, owing to the lack of rail capacity, part of the Russian coal volumes previously sent by rail to Europe or shipped from north-western Russian ports towards Europe cannot be redirected to the east or the south.
This has resulted in a decline of Russian exports and a tightening of the market. The gap left by Russian coal supplies in Europe has been largely filled by South Africa, Colombia, and other smaller producers such as Tanzania and Botswana. Indonesia, which started the year banning coal exports to meet its own domestic demand, once again demonstrated its flexibility as it shifted its exports to Europe to help offset the Russian shortfall.
By contrast, the United States is not a swing supplier anymore. Struggling with investment, workforce shortages and transport bottlenecks, US coal exports are set to decline marginally despite high prices. Meanwhile, rains and floods in Australia have curtailed production, contributing to the tight market.
Tight markets and war premium propelled coal prices to record levels in 2022
Supply and demand imbalances combined with high gas prices pushed thermal coal prices to unprecedented highs in October 2021. Almost immediately, China and India accelerated production to ease the market, and prices soon fell back to lower levels. When Indonesia banned exports in January 2022, international prices rose again while Chinese prices remained more stable, as the local market was well supplied.
Russia’s invasion of Ukraine in late February, however, sparked a surge in gas prices, which in turn pushed coal prices up to new records in March and during the summer. Further support for prices came from a war premium and an increasing perception of a risk of physical energy shortages.
Prices have moderated since the summer as supply worries have eased. Rains in Australia further exacerbated market tightness during the year, exceptionally pushing prices for high quality thermal coal above those for high-value coking coal. With the EU ban on Russian coal phased in from April to early August, prices for Russian coal have been sharply discounted.
Despite record profits for producers, there is little appetite for more investment in coal mining assets
The record highs for coal prices seen since October 2021 and a renewed focus on energy security since Russia’s invasion of Ukraine might have been expected to drive an uptick in investment in coal mine assets.
However, outside China and India, where domestic production has been ramped up to reduce external reliance, there are no strong signs of reversal of the investment trends.
Governments, banks and investors – as well as mining companies – continue to show, in general, a lack of appetite for investment in coal, particularly thermal coal.