The supply squeeze in the seaborne thermal coal market brought on by China ramping up imports of non-Australian thermal coal at a time of a cyclical upswing in global demand has pushed thermal coal prices higher, but Fitch Solutions believes the price rally will lose momentum in the first half of 2021.

Amid a so-called ban on Australian coal into China amid a diplomatic row, Newcastle coal futures have surged in the last three months, from a 2020 low of $56/t in September to $77/t in mid-December.

Fitch notes that the inability of domestic Chinese supply to ramp up sufficiently to compensate for the Australian ban has resulted in strong Chinese imports from suppliers, such as South Africa. At the same time, coal demand has been increasing in other significant coal consumers such as India, Japan and South Korea, which helped to offset the negative impact of China’s ban on Australia’s coal sales.

However, the group believes the short-term supply squeeze will fade in early 2021, as the surge in prices since September has encouraged production that has been taken offline during 2020 to partially come back on line.

“In Australia, weak sales to China had led to a significant build in domestic port stockpiles by November. This inventory overhang will enable exports to increase in response to currently high prices, which will improve supply on the seaborne market and take the wind out of the current price rally,” states Fitch.

Reduced disruption to mining operations from the Covid-19 pandemic will see production increase in India, Russia and South Africa in early 2021.

Given the price rally in the last three months, Fitch expects thermal coal prices to average $66/t in 2020. Given that prices will also start 2021 at a higher-than-anticipated level, the group has increased its average price forecast for 2021 from $58/t to $62/t.

However, prices are expected to head back towards $60/t by mid-2021, as the supply squeeze will fade.

Fitch has kept its long-term forecast unchanged, owing to a structural oversupply. Thermal coal prices are forecast to average $44/t in 2029, which will be a 33% decline compared with $66/t in 2020.