Even before the pandemic, coal faced a difficult outlook for 2020. Demand was being squeezed by a mild winter in the Northern Hemisphere, low natural gas prices and strong renewables growth. When electricity demand and natural gas prices plummeted as the Covid-19 crisis escalated, coal-fired power generation bore the brunt of the impacts. Reduced industrial activity also hit coal demand, although in a more limited way. In the early months of the crisis, a double-digit annual decline in global coal demand looked plausible. But economic recovery in China came sooner and stronger than initially expected, with year-on-year growth resuming as early as in April. With economic recovery following elsewhere and a cold snap in December in Northeast Asia, global coal demand fell by 4.4% in 2020 – the largest decline in many decades but less than initially expected. The regional disparities were large. Coal demand grew by 1% in China in 2020 but dropped by nearly 20% in the United States and the European Union – and by 8% in India and South Africa. 

China’s influence on coal markets is difficult to overstate. China’s power generation, including district heating, accounts for one-third of global coal consumption. China’s overall coal use is more than half of the global total. Coal demand in China is underpinned by fast growing electricity demand and the resilience of heavy industry.

This is despite a decade of strong and sustained efforts to diversify the country’s power mix – during which China has expanded hydro, wind, solar and nuclear power capacity by more than any other country in the world – and intensive switching from coal to natural gas in the residential heating and light industrial sectors. China is also the world’s largest coal producer and importer, with domestic price swings from supply-demand imbalances immediately impacting international markets.

Coal production failed to keep pace with rebounding coal demand in 2021, especially during the first half of the year, cutting into stock levels and pushing up prices. In China and India, where coal shortages led to power outages and idled factories, domestic policies to ramp up production and reduce coal shortages were soon implemented, facilitated by the large presence of state-owned companies in production. The main coal exporting countries were prevented from fully taking advantage of high prices by supply chain disruptions, such as flooding in Indonesian mines. 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. Futures contracts for coal are trading well below spot prices, which is not conducive to investment. Coal production is forecast to reach an all-time high in 2022 and then plateau as demand flattens. 

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. Japan, Korea and China have also committed to stop public funding for building new coal power projects abroad, severely limiting the possibilities for expanding coal-fired generation in many countries. New commitments during COP26, such as the Global Coal to Clean Power Transition Statement to accelerate the transition from unabated coal power generation, put additional pressure on coal. The coal power generation rebound in the United States and Europe in 2021 is a blip, and coal demand will resume its decline in both regions. However, Asia dominates the global coal market, with China accounting for more than half of global demand, or two-thirds if India is added. These two economies – dependent on coal and with a combined population of almost 3 billion people – hold the key to future coal demand. The fate of coal depends on how quickly and effectively countries move to implement their net zero commitments. And the level of coal demand in a net zero carbon economy will depend on how successful efforts are to deploy carbon capture, utilisation and storage (CCUS) technologies.