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Column: Europe’s gas price plunge churns up global coal markets

These translations are done via Google Translate

LITTLETON, Colo. Jan 18 (Reuters) – Thermal coal markets were a prominent beneficiary of Europe’s power sector turmoil in 2022, with prices surging more than 250% through mid-March as utilities and trading firms scrambled to replace lost supplies of Russian natural gas with other fuels.

Benchmark European thermal coal prices remained close to historic highs throughout 2022 on sustained higher use across the continent, averaging roughly $285 per tonne for the year, compared with about $115 a tonne in 2021.

Higher coal use also yielded more pollution, with cumulative discharge of carbon dioxide (CO2) by Europe’s coal power sector topping 600 million tonnes through November, the highest tally for the period since 2019, data from Ember shows.

However, thanks to a recent plunge in European natural gas prices – down 60% since December 1 on mild winter temperatures, filled storage tanks and diminished industrial use – European coal prices and demand have slumped so far in 2023.

That clashes with the more bullish posture of coal markets in top coal consuming region Asia, which has been bracing for sharply higher coal use and purchases in 2023 as dominant coal consumer China reboots its economy following a COVID-hit 2022.


The divergent tones of Europe’s and Asia’s coal markets are captured by the record-wide price spread between them.

From 2010 through 2020, Europe’s API2 (All Publications Index) coal price and Asia’s Newcastle coal price traded within $50 a tonne of one another, with Newcastle prices averaging a $5.70 premium over API during that 11-year span.

This week, that spread surpassed $200 a tonne as Asia-focused Newcastle coal prices held firm around $370 a tonne while European coal prices slumped to $165.

Asia & Europe thermal coal prices break apart
Asia & Europe thermal coal prices break apart

Such a wide dislocation is not sustainable, and trading firms sitting with large stockpiles of coal in Europe will likely hastily look to divert them to pricier Asian markets.

Over the near term, such actions will likely narrow the arbitrage window by applying pressure to Asia’s coal prices.

But over the longer run European power markets will be roiled by any sustained diversion of coal supplies to other regions, especially with natural gas supplies set to remain tight as planned sanctions on Russian supplies kick in.

At the same time, substantially weaker coal prices in Asia will likely distort buying patterns and trade flows there by encouraging further coal imports by major buyers such as China and India, and potentially curtailing sales by cost-sensitive exporters such as Australia.

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Ultimately, the outlook for the coal market in 2023 depends in large part on whether Europe regains a sustained hunger for the fuel.

European natural gas and coal markets became highly interconnected in 2022 as utilities and trading firms were forced to accommodate sharply lower expected supplies of pipelined Russian natural gas while competing for sharply higher volumes of thermal coal and other power-generating fuels.

European natural gas & coal prices surged and became more volatile in 2022
European natural gas & coal prices surged and became more volatile in 2022

Both commodities scaled record price highs during the month following Russia’s incursion into Ukraine, while gas prices pushed to further new heights in August as a heatwave cranked up air conditioner use.

Since then, both markets have remained in lockstep – with a price correlation of 0.92 since September 1 – even as the price trend reversed over the second half of 2022 with a plunge in gas prices.

Going forward, the two markets look set to remain handcuffed, with the weather and the scale of gas stockpiles in Europe playing a decisive role in determining the price trends for both.

Europe has averted any major cold snaps so far this winter, which has led to a historic swell in natural gas stockpiles that will struggle to accommodate any additional inflows.

Those high stocks have in turn been a major driver behind the gas price falls seen since December.

Yet gas inventories remain vulnerable to steep drawdowns should a late winter cold spell kick in just as use from industry starts to recover from the belt-tightening retrenchments seen across Europe in 2022.

In addition, any potential gas stock depletion would be exacerbated by a tightening in local coal markets, as utilities are already under pressure to reduce use of the highly polluting fuel, and are now faced with the most affordable gas prices in close to a year.

So while Europe’s flailing weak gas market is currently the main drag on the region’s coal market, any upturn in European gas demand stands to underpin the coal market as well.

This ensures that the two markets look set to remain intrinsically linked and mutually influential for as long as Europe’s energy system relies predominantly on fossil fuel imports for heating and power.

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