Coal Outlook 2022: Lower Prices Ahead, Investment Slows Down

As the world moves towards green energy, what will happen to coal? Read on to learn what analysts see for the coal outlook in 2022.

Click here to read the previous coal outlook.

Like all other commodities, coal had to navigate the COVID-19 pandemic in 2020, with prices for the material stabilizing and then pulling back by the end of the year.

In 2021, coal prices surged on the back of the economic recovery, but with renewable energy adoption continuing to grow as governments push for cleaner sources of power, many wonder what could be next for coal.

As the new year starts, what can investors expect in 2022? Read on to learn more about coal’s performance in 2021, as well as what experts see coming for the future coal outlook.

Coal trends 2021: The year in review

Following an uncertain 2020, 2021 was set to be a year of reopenings and economic recovery. For coal, demand remained strong, with the amount of coal-generated electricity worldwide surging toward a new annual record.

After falling in 2019 and 2020, global power generation from coal is expected to jump by 9 percent in 2021 to an all-time high of 10,350 terawatt hours, according to the International Energy Agency’s (IEA) Coal 2021 report.

“The rebound is being driven by this year’s rapid economic recovery, which has pushed up electricity demand much faster than low-carbon supplies can keep up,” the IEA states. “The steep rise in natural gas prices has also increased demand for coal power by making it more cost-competitive.”

Prices for coal ended 2020 on the rebound as demand started to surge, and the commodity was lifted further in 2021 as demand outstripped supply in China, known as the global coal price setter. Supply disruptions and higher natural gas prices globally also helped to buoy prices for coal.

“Coal prices reached all-time highs in early October 2021, with imported thermal coal in Europe, for example, hitting US$298 per tonne,” the IEA report reads. “Quick policy intervention by the Chinese government to balance the market had a rapid effect on prices.”

Looking over to how supply performed in 2021, output was unable to keep pace with demand.

“The main coal exporting countries were prevented from fully taking advantage of high prices by supply chain disruptions, such as flooding in Indonesian mines,” the IEA report says. “Years of lower investment due to financing and bureaucratic restrictions also played a role. Outside China, most of the additional production in 2021 came from existing mines or reopened mines that had been idled during periods of low prices.”

Similarly, metallurgical coal saw strong demand and tight supply — which drove prices higher throughout 2021.

“China’s informal import restrictions on Australian exports have obliged the country’s steel mills to draw in supply from virtually all non-Australian sources. India, Japan, South Korea and the EU have all switched to Australian-sourced imports in response,” the Australian Office of the Chief Economist (OCE) explains in its latest report.

Coal outlook 2022: What’s ahead for supply, demand and prices

When looking at what’s ahead, IHS Markit analysts believe that while the current thermal coal market is very solidly bullish, this strength is a near-term phenomenon.

“Zooming out from the current volatility, the fundamentals look bearish,” they said.

In 2021, pledges to reach net-zero emissions took center stage, with coal being a main driver of discussions.

“The pledges to reach net zero emissions made by many countries, including China and India, should have very strong implications for coal – but these are not yet visible in our near-term forecast, reflecting the major gap between ambitions and action,” the IEA’s coal report notes.

Looking over to future supply, surging prices have not led to a rush of coal investment.

“Investment in coal remains low amidst market and policy pressure, which has been affected by announcements in and around the recent COP26 summit,” the Australian OCE says.

From the projects that are moving forward, there is a growing preference for expansions of brownfield sites over new greenfield investments, the OCE states in a separate report, Resources and Energy Major Projects 2021.

“The growing reluctance to commit to greenfield coal projects has been impacted by an expanding list of lenders/investors who have withdrawn from financing new thermal coal projects,” the OCE comments. “Some pension and equity funds are also divesting from, or limiting their exposure to, thermal coal, limiting the range of investment financing options available to coal project developers.”

Australian thermal coal prices weakened slightly over the last month of 2021 amid ongoing intervention in the market by the Chinese government, taken in response to soaring prices in September and October.

“Despite this, upward support to prices came from concerns over weather-induced supply disruptions, with flooding in Australia hampering access to coal mines,” FocusEconomics analysts said about the material in their latest report. “This follows a trend of weather-related disruptions in the last year, with forecasts for Australia indicating a wetter-than-average summer.”

Panelists polled recently by the firm see thermal coal prices trending downwards next year as supply normalizes somewhat and amid weaker demand growth overall. They project that the price of thermal coal will average US$115.10 in Q4 2022 and US$89.10 in Q4 2023.

Similarly, IHS Markit is confident that weaker thermal coal prices are coming.

“It is difficult to imagine that a supply-side that was more than able to meet 2019 demand levels would have much trouble meeting a 2022 demand level that is likely 40 to 50 (million metric tonnes) lower than that,” analysts said.

However, there are risks around the timing, with prices expected to ease substantially in spring 2022. “But if the equipment shortage in Indonesia lingers or prolonged rains return in 2022, then prices could remain supported longer,” as per IHS Markit. “And if the coming winter proves mild then an earlier timing could easily occur.”

Looking over to metallurgical coal, prices for Australian coking coal should decrease from their current high level next year as supply and demand imbalances ease.

“An expected increase in global supply amid fading bottlenecks, soft demand from China and a normalization of energy demand growth should underpin the moderation,” FocusEconomics analysts said. “The Omicron variant poses a significant risk, as do adverse weather conditions.”

FocusEconomics panelists see prices averaging US$178 in Q4 2022 and US$135 in Q4 2023.

“Growth in steel production is one of the main drivers that contribute the most to the rising global demand of metallurgical coal,” IHS Markit analysts said. “Mainland China should reach peak steel production in the coming years but there are still large uncertainties around when.”

For the OCE, supply and demand are expected to come into better balance over 2022 as supply disruptions pass. Supply growth is expected from Canada, the US, Australia and Mongolia.