Coal Market Forecast 2023: Top Trends That Will Affect Coal in 2023

How did coal perform in 2022?

Prices for thermal coal, widely used in power stations to generate electricity, started the year trading upwards as tight supply and Russia’s invasion of Ukraine impacted the sector.

“The war poses a direct risk to Russian supplies via damage to infrastructure and shipping and an indirect risk via Western sanctions,” analysts at FocusEconomics explained back in March. “Both ongoing Indonesian export quotas and the war have thus boosted demand prospects for Australian coal.”

Similarly, metallurgical coal prices increased on the back of Russia’s invasion of Ukraine. Metallurgical coal, also known as coking coal, is used to produce coke, the primary source of carbon used in steelmaking.

“This comes amid an already-tight market, with production in Australia continuing to be hit by heavy rains plus supply disruptions and with Indonesian exports still constrained by quotas,” FocusEconomics analysts said.

Despite pledges to reach net-zero emissions, the ongoing war sent oil and gas prices up in 2022, which in turn had many countries increase their coal use despite their clean energy commitments.

In addition, production in Australia continued to be hit by wet weather and COVID-19-related worker absences. Australia is the fifth largest producer of coal as well as the second largest exporter, and has the third largest reserves in the world. "Meanwhile, a proposed EU ban on Russian coal means prices are likely to stay elevated in the near term,” FocusEconomics said in a May report.

According to the International Energy Agency (IEA), coal's traditional trade flows were disrupted in 2022, with prices soaring and demand set to grow by 1.2 percent, reaching an all-time high and surpassing 8 billion metric tons (MT) for the first time.

“Coal used in electricity generation, the largest consuming sector, is expected to grow by just over 2 percent in 2022,” the intergovernmental organization notes. “By contrast, coal consumption in industry is expected to decline by over 1 percent, mainly driven by falling iron and steel production amid the economic crisis.”

Even though the spike in prices may have many wondering if investments in the sector have surged, the IEA states that outside China and India, where domestic production has been ramped up to reduce external reliance, there are no strong signs of reversal in 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,” the agency said.

What factors will move the coal market in 2023?

When looking at what’s ahead for the sector, China and India are likely to boost domestic coal production in 2023, which could have a bearish impact on US seaborne coal demand, according to S&P Global Commodity Insights.

The firm forecasts that China's 2023 domestic coal production will come in at 4.9 billion MT, up from 4.5 billion MT in 2022. India's coal production is projected at 950 million MT in 2023, up from 840 million MT in the year.

For its part, the IEA forecasts that global coal demand will plateau around the 2022 level of 8 billion MT 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,” the agency says in a coal-focused report.

In the coming years, coal demand is forecast to fall in advanced economies as renewables increasingly displace it for electricity generation. However, emerging and developing economies in Asia are set to increase coal use to help power their economic growth, even as they add more renewables, according to the IEA.

“The world is close to a peak in fossil fuel use, with coal set to be the first to decline, but we are not there yet,” said Keisuke Sadamori, the IEA’s director of energy markets and security, at the end of 2022.

“Coal demand is stubborn and will likely reach an all-time high this year, pushing up global emissions. At the same time, there are many signs that today’s crisis is accelerating the deployment of renewables, energy efficiency and heat pumps — and this will moderate coal demand in the coming years. Government policies will be key to ensuring a secure and sustainable path forward.”

India is expected to see the largest increase in coal demand, followed by the EU at 6 percent and China at 0.4 percent.

In terms of prices, the Australian Office of the Chief Economist is expecting the recent decline in thermal coal prices to continue as factors behind the record price surge of mid-2022 continue to unwind.

“Thermal coal prices remain elevated amidst ongoing weather disruptions and issues with access to finance/insurance,” the organization said. “As weather conditions normalize, the Newcastle benchmark price (6,000 kcal) is forecast to fall from an average of US$360 a tonne in 2022, to around US$200 in 2024 (still well above historical averages).”

Similarly, thermal coal prices should fall sharply by the end of this year to the lowest level since the war in Ukraine began. “This decline will be driven by softer demand growth arising from a slowing global economy,” analysts at FocusEconomics said.

Investors interested in coal should keep an eye on factors such as the effect of sanctions on Russian energy, a potential end to China’s unofficial ban on Australian coal, the Australian government’s climate change policy and more heavy rain in Australia.

The story is similar for metallurgical coal prices, according to FocusEconomics, as prices are seen easing further in 2023.

“The market is oversupplied and will remain so in the medium term,” the firm's analysts said. “Australian output should pick up as meteorological disruptions ease, while demand will be knocked by slowing global growth.”

Key risks to the outlook include additional extreme weather events, thermal coal prices, green transition policies, disruptions arising from the spread of COVID-19 in China and the effect of sanctions on Russia.

The Office of the Chief Economist is also expecting coking coal prices to correct in the near term.

“While metallurgical coal prices have lifted in recent months, it is not expected that this rise will be sustained for long,” it said in its December report. “The lift was largely driven by temporary supply disruptions as opposed to market fundamentals, and demand remains relatively constrained with global steelmaking output likely facing a period of softness.”

Prices for Australian hard coking coal are expected to decrease from US$377 per MT in 2022 to around US$230 in 2024.