Graphic: Thermal coal to rebound, more gains pegged on tighter supply

LONDON (Reuters) - Thermal coal prices are expected to start recovering from lows seen this spring as demand for power grows in tandem with countries loosening Covid-19 restrictions and as more lenders tighten financing for new capacity.

Coal is sorted into a pile at a warehouse of the Trypillian thermal power plant in Kiev region, Ukraine November 23, 2017. REUTERS/Valentyn Ogirenko/Files

European benchmark coal futures for 2021 have gained almost 20% at around $60.00 a tonne since May.

European API2 2021 coal price

Analysts at Fitch Solutions see upside limits though.

“We do not expect prices to average higher in 2020 compared with 2019 as overall global demand will remain weak, while global production stays buoyant,” they said.

Asia’s benchmark thermal coal price at Australia’s Newcastle Port for month-ahead delivery, currently around $49 a tonne, should rise in line with higher Chinese power demand and economic activity.

The global coal supply deficit should ease to 535 million tonnes this year from 587 million tonnes last year, Fitch Solutions said.

Several coal plants and mines have become unprofitable on weak demand and low prices this year, with some companies announcing stoppages and closures.

China, however, which produces and consumes about half of the world’s coal, has said it would allow more provinces to start building coal power plants from 2023. Other south east Asian countries still rely on coal to power industrial growth.

According to the International Energy Agency, around 140 gigawatts (GW) of coal capacity will be added in Asia by the end of 2023, while 100 GW will be retired - equal to a net increase of 40 GW, mainly in China and India.

Investors widely anticipate a slow demise of coal use due to policies encouraging cleaner natural gas and renewable energy generation, plus public pressure on climate change and divestment from coal assets.

For several European countries and the United States, weaker gas prices have reduced coal’s appeal for power generation.

Data released by think-tank Ember showed Europe speeding up its exit from coal in a transition smoothed by the rise of renewable energy.

EU renewable electricity generation as a % of the total April-June 2020

The U.S. Energy Information Administration forecasts that both nuclear and renewables’ share of power generation will top coal for the first time this year.

Longer term, a global coal supply surplus should continue to reduce, which could help lift prices, analysts said.

“Despite a setback in new installations, the advance of renewable energies is slowing down coal demand, as is the currently generous and therefore cheap supply of gas,” said Barbara Lambrecht, energy analyst at Commerzbank.

Reporting by Nina Chestney; additional reporting by Susanna Twidale; editing by Elaine Hardcastle