Global coal outlook
Thermal coal prices remained low for almost all of 2020 due to industrial production slump caused by Covid-19. In Q2, regional benchmarks updated multi-year lows: in Europe - below $40 per ton, in Asia - below $50 per ton. By September, however, European prices had risen to their highest in almost a year, as gas prices had almost quadrupled since the summer and coal supplies from Colombia were disrupted (amid the Cerrejón strike). In November-December 2020, the markets expected a weaker demand from China, as in previous years, as Chinese regions had exhausted their 2020 import quotas. In addition, the second wave of Covid-19 and new partial lockdowns in Western Europe suggested a decrease in electricity demand relative to seasonal norms. However, unexpectedly low temperatures and an increase in China's imports of non-Australian thermal coal have driven prices up sharply and widened the spread between regional benchmarks.
According to some market participants and experts estimates, at the end of 2020 the low conjuncture on the thermal coal market was over and it became bullish following the concept of a cyclical global economy and commodity markets. However, these statements sound hasty as the actual structural and price imbalance of the regional coal markets was most likely caused by such uncontrolled non-market impacts as low winter temperatures in the Northern Hemisphere in 2020-2021 and trade sanctions imposed by China for the political reasons, resulting in redistribution of commodity flows in both the Pacific and Atlantic regions. While the climate condition effect is limited by a heating period, the tension between China and Australia fuels the market uncertainty.
Admittedly, it reminds 2016, when the "euphoria" in the coal market was also driven by China, where restrictions on domestic coal mining imposed by the Chinese government and the cold winter forced the market to turn up. However, that year (2016) the coal output in China declined for the third consecutive year, while in 2020 China had managed not only to stabilize, but even to increase coal output slightly, despite safety problems and financial difficulties faced by the industry. At the same time, China continues to reform the industry, including consolidation and development of railway infrastructure. In October 2020, the first National Coal Trading Center started operation. Its shareholders account for 45% of coal production, 55% of coal consumption and 75% of coal transportation in the country. Besides, the capacity of Chinese coal-fired power plants increased by 33.39 GW in 2020, and the construction of 34 GW of coal-fired power plants was approved that is three times more as compared to the previous year. As a result, the total number of capacities under construction has reached 88 GW, and 247 GW of coal projects are under development.
«Green» initiatives and low carbon energy transitions of the developed countries increasingly effects the coal industry: US president, Joe Biden, returned America to the Paris climate accord, EC member leaders agreed to cut carbon emission by 55% of 1990 levels by 2030. However, cold winter of 2020-2021 again raises the issue of adaptability and acceptability of “green” energy technologies to the extreme and unstable climatic conditions, as well as general reliability of power systems based on RES. For instance, in January 2021, coal generation in the Western Europe grew by more than 10% as compared to the same month of the last year due to low temperatures. Germany initiated the discussion that the country is forced to return to fossil fuel energy system (coal, gas, nuclear power), as wind turbines and solar panels cannot be run safely. Arctic frosts gripped Texas (USA) causing collapse on the energy markets and power outages resulted from the shutdown of wind turbines and freezing of gas wells, while the demand for electricity soared. Considering the transition to "green energy", it is worth reading the forecast of the US Energy Information Administration (EIA), according to which coal production in the country will climb over the next two years (by 9% in 2021 and by 1% in 2022). This growth reflects the higher expected demand for coal in the country's energy sector due to rising of natural gas prices.
Forecast. The upward trend will already lose its impulse in the first half of 2021 when normal temperatures return. The short-term supply decline ends in early 2021, as price increases since September have stimulated a production recovery at some coal assets halted in 2020. Low prices in the first half of 2020 resulted in about 25% of thermal coal exports being unprofitable, as a result, the decrease in world thermal coal production is estimated at 450 million tons (according to IEA).
In Australia, weak sales to China led to considerable stockpiling in the country ports. This surplus will increase the seaborne supply and dampen the current rally in prices. Prices are expected to roll back to lower levels by mid-2021 as supply rises. Coal demand and import in China will weaker after the Chinese Lunar New Year due to the higher temperatures and mining stabilization.
After the end of the long workers’ strike on the Columbian coal mine Cerrejón on November, 30, in December 2020 coal shipments resumed, though due to the railway blockade there was a problem with cargos shipment in January 2021.
We expect that thermal coal prices will remain at acceptable (from the point of view of economic feasibility of mining) economically efficient levels in the coming years. Supply growth will be limited in the face of problems with financing new projects and the current activities of coal miners, the availability of logistics infrastructure in key exporting countries, and exit from coal assets by large players. In addition, energy security priorities and the political challenge of raising electricity tariffs to pay for cleaner but more expensive sources will constrain the growth of alternative energy, thereby supporting demand for thermal coal.
Thermal coal prices forecast
The last quarter of 2020 was volatile for Australian coking coal (HCC) prices. At the beginning of the quarter, the base price rose sharply to $140 per ton, and then fell by 30% to $98 per ton in November. If the fall in prices in early 2020 was caused by the steel industry slowing due to the COVID-19 pandemic, the November price decline came during a period of strong industry recovery. The fall in prices reflected significant uncertainty as traders in China reported that Australian coal exports could be subject to unofficial import restrictions. This was followed by an official ban. At the same time, domestic prices in China moved in the opposite direction. Chinese companies switched to purchasing high quality coking coal from Canada and the USA, Mongolia and Russia.
Coking coal prices recovery in Australia will largely depend on Chinese policy and signals from the Chinese government. It is expected that in 2021 coking coal prices will continue to recover in line with the global steel production. The most important risk to price projections is a scenario in which China's restrictions on Australian coal imports extend throughout 2021. In this scenario, Australian prices will remain low for longer as exporters will take time to adjust and reroute shipments.
Coking Coal prices forecast
Russian Coal Market
- Russia’s share in world coal production is projected to be 5.4% (preliminary). Russia’s share in world thermal coal production is 4.9%, and its share in world coking coal production is 8.7%.
- Russia’s share in world coal exports is projected to be 16.4% (versus 15.3% in 2019). Russia’s share in world thermal coal exports is 18.6%, and its share in world coking coal exports is 9.4%.
- Rail shipments amounted to 353.3 million tons, of which 199.6 million tons were exported (or 56.5% of the total volume). The share of coal rail shipments in the total production in the country is 88%. Coal turnover in 2020 - 1,094.6 billion ton-kilometers (43% of the total cargo turnover). Average range - 2 844 km.
- Sea ports handled 188.6 Mt of coal (+7.1% compared to 2019 level).
- The relative weight of profitable coal miners as at November 2020 is 43%.
- The issue of ensuring coal exports remains one of the key issues on the agenda. Russian Railways are trying to improve the revenue structure of the cargo traffic on the grounds that coal transportation spoils the monopoly's financial performance and the ESG bond market. Transition to long-term contracts for the coal transportation is currently under discussion. The government, in turn, intends to determine the volume of coal that will be exported by rail to the East in the coming years, and aims to match the production level to this figure.
Forecast by the Ministry of Energy of Russia. Given the impact of the coronavirus crisis, a decrease in coal production and exports is expected. Moreover, the amount of tax payments to the budget from the coal industry in 2020 and 2021 will likely be 10% lower. The domestic market is almost depleted, especially in the light of the country's large-scale gasification program. There is still hope that after 2021 Russia will be able to generate growth in coal exports (although Russian coal companies are trying to take advantage of favorable pricing conditions in the global market by increasing the volume of foreign sales). In the coming years, the exports of coal from Russia may drop as a result of both the reduction in terms of coal consumption in European countries and the inability to fully compensate for the lost volumes by increasing supplies to the East (i.e. APR countries) due to the insufficient throughput capacity of the Eastern Polygon.
The Ministry of Energy of Russia still believes that Russian coal producers will heavily be investing in the exports of products in favour of the APR in the coming years. Total supplies to the APR will reach 174 Mt by 2025, which is 42% more than was exported in 2020. The Indian Ocean countries, such as India, Vietnam, Malaysia, Indonesia, Thailand, etc., will be the regions with the fastest-growing demand for coal (which is more than twice bigger than the previous year’s figure). In 2025, the exports of Russian coal in this direction may amount to 57.5Mt.
Domestic and Export Thermal Coal Prices
Domestic and Export Coking Coal Prices
 According to preliminary estimates by IEA, world coal production in 2020 is projected to be 7,438 Mt, of which 6,409 Mt are thermal coal grades, and 1,029 Mt are coking coal grades.
 According to preliminary estimates by IEA, world coal exports in 2020 is projected to be 1,292 Mt (in comparison with 1,445 Mt in 2019), of which 983 Mt are thermal coal grades, and 309 Mt are coking coal grades.