Coal prices vary by region as well as by grade and quality. The price rebound starting in 2016 ended in 2018, moving in a downward trend in 2019. After stabilisation of prices in the beginning of 2020, Covid-related demand suppression pushed prices down. FOB prices for thermal coal with a calorific value (CV) of 6 000 kcal/kg which had hovered around USD 100/t in early 2019, had fallen to USD 65/t a year later and in late 2020 is trading closer to USD 50/t, a 50% decline, to rebound in November to same levels than one year ago. A similar trend applies to coking coal prices, which plummeted from USD 200/t to USD 100/t over the same period, but Chinese restrictions to Australian coal has prevented the latest uptick.

The price decline followed a period of high prices dating back to early 2016. In 2016 and 2017 prices increased due to supply-side restrictions in China as well as increasing demand. In the first eight months of 2019, thermal coal prices declined due to increased supply in the seaborne thermal coal market as producers reacted to higher prices in 2017-18. In addition, demand was dampened by weaker electricity demand and lower LNG prices. Import restrictions in China in the fourth-quarter 2019 added pressure to coal prices.

Spot prices for thermal coal were stable in the first-quarter 2020, despite a plunge in oil and gas prices. The lockdown in China led to a decline in electricity consumption and industrial output, but also to an increase in seaborne imports due to a reduction in domestic production as miners were unable to get to their workplaces and mines were closed as part of the containment measures. This shifted in April, as prices for thermal coal fell sharply reaching the levels of early 2016 as a result of the global decline in demand and the simultaneous recovery of coal production in China. Import quotas in China have also pushed international coal prices down by depressing demand. At the end of the third-quarter 2020, prices started to recover as demand beyond China picked up and the supply side adjustments had cut production.

Coking coal prices slipped in mid-2019 due to slowing global economic growth and weak steel production outside of China, notably in India.

Spot prices for coking coal rose in the first-quarter 2020. This was due to the reduction of coal production in China related to the pandemic and to Mongolia's decision to close its border with China which boosted China’s import of seaborne traded coking coal. On the supply side, a roof collapse at the Moranbah North mine in Queensland and bad weather in Australia also supported higher spot prices. As global steel production collapsed outside China due to pandemic containment, the price of coking coal fell to around USD 110/t in April 2020. At the end of the third-quarter, coking coal prices saw an uptick as demand from steelmakers outside of China increased production. Forecasts of heavy rain in Queensland also supported higher prices, but the difficulties of Australian coal in Chinese customs have pushed prices down.

The coal price spread between Europe and Asia has widened since 2018. While prices in the Asia Pacific region are supported by robust growth in demand, coal demand in Europe is waning. In 2019, CIF prices for thermal coal in Northwest Europe were consistently lower than FOB prices in Newcastle (New South Wales, Australia). Lower prices in Europe were driven by falling demand due to low natural gas prices and policies to reduce coal use in Europe. The correlation between both prices is getting weaker.

European coal imports in 2019 originated mainly from Russia and Colombia. Since exports to the Pacific Basin are more costly for Colombian producers and exports from Russia to the Asia Pacific region are constrained by transport infrastructure limitations, arbitrage opportunities arising from the price spread between the Atlantic Basin and the Pacific Basin cannot be fully exploited by producers. Therefore price spreads persisted. In order to compare European CIF and Asian FOB, it is important to remember that CIF includes freight and insurance.

A wide spread between prices in Europe and Asia was apparent at the start of 2020. As demand around the world plummeted so did prices in both regions. However, while prices in Asia remained on low levels in the middle of 2020, prices in the Atlantic Basin picked up in June as supply adjustments in Colombia and the United States were bigger than in Asia. In that moment, cheap freight rates enable exporters to exploit arbitrage opportunities between the markets, which supports price convergence.

In 2019, prices for thermal coal in the Pacific Basin seaborne market were systematically lower than domestic prices in China. Thermal coal imports were on average 20% cheaper than domestic coal shipped from the northern ports.

Imports into China have been restricted by government policies for a few years. The most recent policy, according to market participants, is the establishment of import quotas. The exact terms of the policy or the volume amount of the quotas are not disclosed by official sources. Some ships, in particular those bringing coal from Australia, have experienced customs delays which increase costs and demurrage. This is part of China’s policy to rein in imports in order to support its domestic coal industry. The government’s target is to keep the domestic coal price in the range of RMB 500-570/t. The reference price for this determination is the Bohai-Rim Steam Coal Price Index (BSPI), a gauge of coal prices in northern China’s major ports. The price level aims to ensure sufficient profitability for domestic coal producers and customers.

But by restricting imports, the spread between domestic and international prices has become wider in recent months. After the spread declined in first-quarter 2020, the spread continued to grow in the second-quarter, when restrictions were expanded. While the Australian price remained at a low level after declining in April, the domestic price recovery started in China. The economic recovery in China led to a reduction of stockpiles as power demand recovered but subsequently, due to tightened import restrictions, the reduced demand for foreign imported coal led to a decoupling between domestic and seaborne prices. The restrictions led to additional pressure on seaborne prices, as the continuing low demand outside China was accompanied by a further reduction in sales opportunities to China. The price spread indicates arbitrage opportunities for Chinese traders, which were not able to be exploited due to the import restrictions. This increases the pressure on policy makers in China, which have to balance the support of domestic production against the economic attractiveness of lower import prices.

Thermal coal, traded in the Pacific Basin, can be categorised by its calorific value (CV). Although there is a potential for substitution between the various qualities of coal, the differences represent separate market segments.

In 2019, thermal coal with high CV (> 5 700 kcal/kg) accounted for around 43% of thermal coal exports to countries in the Asia Pacific region. About 85% of thermal coal exported from Australia is high CV and it is the main exporter of high CV thermal coal to countries in the Asia Pacific region, with Japan, Korea and Chinese Taipei as the main importers.

Thermal coal with low CV (< 4 500 kcal/kg) accounted for about 20% of coal exported to countries in the Asia Pacific region in 2019. Around 95% of worldwide exports of thermal coal with low CV originate from Indonesia. While 37% of coal exported from Indonesia has low CV, only 8% has high CV. The biggest importers for Indonesian coal are China and India.

Low CV coal is cheaper per tonne because of its lower energy content. In addition, low CV coal generally has higher logistics costs owing to higher ash and moisture content and lower efficiencies at final use. Therefore low CV thermal coal is traded at a discount per unit of energy than higher quality coal. Spot FOB prices for low calorific coal in the Pacific Basin in 2019 were on average about 52% lower than prices for high calorific coal.

Blending can offer opportunities to some coal. For example, low sulphur and low ash sub-bituminous Indonesian coal is a good match for high sulphur and high ash Chinese bituminous coal. The prices for low calorific coal from Indonesia are also less volatile than prices for high calorific thermal coal.

The Argus/McCloskey’s Coal Price Index1 (API) API2, which is CIF prices in Europe, showed a contango (when spot prices are below forward prices) for the last year, but consistently USD 60 by the third-quarter of 2022. API4, which is FOB prices at Richards Bay, South Africa, started 2020 in backwardation (opposite to contango), as a result of a price rally in the final-quarter 2019, due to the demand pushed by sponge iron buyers in India in conjunction with the South African utility Eskom, which was buying spot as the coal shortage threatened electricity supply. This was considered temporary and revealed by the January 2020 forward curve. Otherwise, forward curves show a very flat profile, in a very soft contango moving with the spot prices throughout 2020. The Covid-related decline in thermal imports in 2020 will be over 100 Mt (taking into account the decline and the expected growth never materialised), which looked too much for the supply side to absorb. Especially, as import restrictions in China did not allow utilities and traders to take full advantage of the low prices. Production cuts have been the norm among producers during 2020, and the players assumed that the supply demand balance would be restored over 2021, although the market has been quicker than expected. Therefore, the view that FOB USD 70-80/t is the price channel for standard 6 000 kcal/kg is predominant. The disconnection between European and Asian markets is proven as API2 (which is a CIF price) is well below API4, which is a FOB price, in any period considered. The higher contango existing in gas futures (at both the HH and TTF gas hubs) anticipates a slightly better competitiveness of coal versus gas.

Coal supply costs for coking coal as well as for the various qualities of thermal coal decreased in 2019 compared with 2018. The average FOB price for Australian prime coking coal in 2019 was about USD 176/t, a y-o-y drop of roughly 15%. In comparison, supply costs for coking coal decreased only slightly, indicating that the profitability of met coal production decreased.

The supply cost curve for both high and low calorific thermal coal decreased from 2018 to 2019. Average supply costs decreased in all countries, particularly in Colombia and Indonesia, driven by falling fuel prices. Total seaborne thermal coal supply increased by around 30 Mt in 2019; Indonesia in particular increased its output. In 2019 the average FOB price for Australian thermal coal with a CV of 6 000 kcal/kg was about USD 76/t, a decrease of roughly 28% from 2018, indicating a decrease in thermal coal production profitability for high CV coal. Producers of low calorific thermal coal also faced falling prices in 2019. Our analyses indicate that producers that were barely profitable in 2018 were struggling in 2019.

Further declines characterise 2020 and the drop in coal prices put producers under additional pressure. Mining costs, e.g. for diesel fuel, also fell at the beginning of the year, though fuel prices rebounded in mid-2020. Mining saw increased cost for safety measures and social distancing measures related to the pandemic, while coal prices remained low. These factors, among others, mean that a large share of the world's coal mines were not able to operate profitably in 2020, with better economics for coking than for thermal coal.

The cost structure of coal mining is determined mostly by operating expenses such as mining cash costs (e.g. labour, fuel, taxes and royalties) and transportation expenditures (e.g. inland transportation, port fees and seaborne freight rates). The proportions of these costs depend on the mining method, i.e. surface or underground mining, and can vary significantly depending on the producer, country and specific mine location.

Input factors such as fuel, explosives, tyres and steel products are internationally traded and prices follow global trends. Prices for tyres and explosives have remained stable over recent years. Prices for steel products rose from 2016 until the middle of 2018. Since then, steel product prices have weakened against a backdrop of trade friction, uncertain outlook for demand growth and persistence of excess production capacity. On average, diesel fuel prices were 10% lower in 2019 than the previous year.

Oil prices dropped sharply in the first-quarter 2020 and were reflected in diesel prices, which in June fell to the lowest level since 2003. As global oil prices increased, nearly doubling from June to July, so too, did fuel costs for coal producers. 

Decreasing diesel prices cut coal mining operating costs, especially for operators of opencast mines that rely on diesel trucks and other equipment. Low fuel costs particularly benefit countries with mainly opencast mines such as in Indonesia.

Average fuel costs declined in 2019 due to lower diesel prices. In 2020 these effects where strengthened due to the pandemic and the consequent sharp drop in diesel prices, resulting in further declines in average fuel costs. In most countries lower average fuel costs translate to a lower proportion in total mining supply costs.

The development of labour costs differs among coal exporting countries (China is included because the domestic coastal coal trade of more than 700Mt is comparable with global trade). For most, labour costs were relatively stable from 2018 to 2019. Average labour costs in 2020 declined in most countries, though not in the United States, driven by currency depreciation against the US dollar. The share of labour costs in total mining costs therefore increased in 2019 as well as in 2020 because this relative development is also driven by cost declines for other inputs, e.g. fuel. 

Currency exchange rates can have significant effects on a coal exporter’s competitiveness. While revenue streams from coal are largely in US dollars (USD), operating costs such as labour, railway tariffs, port charges and royalties are settled in local currencies. Therefore a depreciation in local currencies implies a reduction in operating costs for the producer, increasing its competitiveness. Currency exchange rates also influence importer’s purchase power and the relative competitiveness of imported coal against substitutes such as domestic lignite or natural gas.

In 2018, and especially in 2019, most currencies of coal exporting countries depreciated against the US dollar as it was supported by relatively strong growth in the United States against the backdrop of weakened global growth and trade frictions. In 2020, driven by the worldwide economic crisis related to the Covid-19 pandemic, currencies of the major coal exporting countries depreciated against the USD. In particular, the emerging markets of South Africa and Colombia have been heavily affected. In the case of Colombia, this is due in particular to its dependence on the price of oil. It is obvious that Indonesia and Australia have not improved competitiveness as much as the other majors, especially Australia, as the Australian dollar has gained some ground versus the US dollar since March 2020.

More than 90% of coal trade is seaborne. Plus seaborne coal trade is around one-quarter of total seaborne dry bulk trade by mass, ahead of grain (9%) and slightly behind iron ore (28%). Dry bulk vessels are categorised according to their deadweight tonnage (dwt), which is a measure of how much weight a ship can carry, (and includes fuel, fresh water, ballast and other provisions for the ship). There are four main vessel types: Handysize; Handymax/Supramax; Panamax; and Capesize. The most commonly used vessels are the Panamax (60 000 - 80 000 dwt) and Capesize (over 80 000 dwt).

Costs of dry bulk shipping are determined largely by fuel prices. Final freight rates are further determined by supply and demand. For instance, at the beginning of 2019, low iron ore imports to China combined with moderate coal imports put pressure on freight rates. Freight rates recovered in the second- and third-quarters of 2019. This was due to a combination of surging iron ore exports from Brazil and a reduction in available vessels related to ships being retrofitted with scrubbers to comply with the IMO-2020 regulation to curb sulphur levels in ship fuels that came into force 1 January 2020. In fourth-quarter 2019, freight rates came under pressure due to a decline in demand as well as a surplus of ships.

In the wake of the collapse in demand for coal and iron ore triggered by the Covid-19 pandemic, freight rates plummeted in the first-quarter 2020. In particular this affects the freight rates on the Queensland-Rotterdam and Newcastle-Japan routes operated mainly by Capesize vessels. Freight rates from Indonesia to China, where mainly Panamax vessels are used, were less impacted by the pandemic. This is partly due to the fact that grain transport, which is also mainly carried out by Panamax vessels, was less affected than the transport of iron ore.

The rebound of the steel industry in China led to a sharp recovery in freight rates by mid-2020. Freight rates spiked again in early October, as China’s booming demand for iron ore was met by surging Brazilian exports.