Hormuz nat-gas shock revives coal trade: IEA

Almost no coal passes through the Strait of Hormuz, but the Middle East conflict is nevertheless lifting coal trade and prices as restricted liquefied natural gas supplies push some power producers back towards the fuel, the International Energy Agency says.

The IEA now expects global coal trade to edge higher this year, reversing its earlier forecast for a contraction. South Korea’s coal imports are forecast to rise by more than 10%, while Japan’s thermal coal purchases are holding around 124 million tonnes after the agency raised its outlook because of higher natural gas prices.

Global coal consumption is forecast to reach a record 8.94 billion tonnes this year, up 1.2% from 2025, according to the IEA’s mid-year update. The increase replaces the slight decline the agency had expected before the Middle East energy shock.

The change shows how coal remains a backup for gas in electricity markets even where long-term consumption is falling. Power generation accounts for about two-thirds of global coal use, making relatively small changes in fuel economics important for overall demand.

Gas-to-coal switch

The link to Hormuz is indirect. The Middle East isn’t a major coal-producing or consuming region and virtually no coal shipments use the strait. Instead, restrictions on LNG flows have raised gas prices and made coal-fired generation more competitive in countries with both gas plants and unused coal capacity, the IEA said in its latest outlook.

Governments have also contributed to the shift. The IEA says several countries have adopted temporary measures encouraging fuel switching during the energy crisis, including moving electricity production from gas to coal, according to its policy tracker.

South Korea is among the clearest examples. Coal demand there is forecast to rise 6% to 119 million tonnes this year, reversing an expected decline, after coal-fired generation jumped 30% year over year in the first quarter. Nuclear outages and expensive gas drove the increase, although returning reactors could curb coal use later this year, according to the IEA’s demand forecast.

Japan is still expected to use 1% less coal this year, but the decline is smaller than previously forecast as higher gas prices support coal generation. China’s demand is forecast to rise 1% to about 5 billion tonnes, helped by electricity demand and increased coal-to-chemicals output as oil prices rose.

India remains a larger source of underlying growth, with demand forecast to climb 4.2% to 1.35 billion tonnes. A strong El Niño is expected to raise cooling demand while reducing hydropower output in parts of Asia.

Trade turns higher

The change in fuel economics has altered the IEA’s outlook for international coal markets. Overall trade is now expected to increase slightly in 2026 rather than contract as previously forecast, according to its trade outlook.

Thermal coal shipped by sea is still expected to decline modestly, largely because China and India are drawing more heavily on domestic supply. But stronger demand in Japan and South Korea is cushioning that fall.

Metallurgical coal is moving the other way. Seaborne coking-coal demand is forecast to rise by 16 million tonnes to about 320 million tonnes this year as India and Indonesia increase imports.

China is also shifting more of its coking-coal supply inland. Mongolian rail exports to China are forecast to rise by more than 50% to about 91 million tonnes after mine shutdowns in Shanxi tightened domestic supply.

Prices recover

Coal prices have responded more strongly than the modest 1.2% increase in global consumption might suggest.

Newcastle 6,000-kilocalorie thermal coal reached about $150 a tonne during the first half and stood at $136 in late August. Indonesian 4,200-kilocalorie coal rose from $45 a tonne at the start of the year to $66 by the end of August.

Australian hard coking coal reached $245 a tonne in July, about 30% above 2025 levels. Major thermal benchmarks reached their highest weekly levels since the beginning of 2024 during the first half, according to the IEA’s price analysis.

The gains remain far below the extraordinary coal-price surge following Russia’s 2022 invasion of Ukraine. The IEA says the current increase largely reflects coal’s connection to gas and electricity markets rather than a direct shortage of coal.

 

China cuts output

Supply is moving in the opposite direction to demand this year. Global coal production is forecast to fall 0.7%, its first annual decline after several years of growth, while remaining above 9 billion tonnes, according to the IEA’s production outlook.

China accounts for much of the decline after a fatal May accident in Shanxi prompted safety inspections and temporary shutdowns at more than 100 mines with combined annual capacity exceeding 100 million tonnes. Chinese production fell about 10% year over year in June and July, the steepest decline since 2016.

That combination of higher-than-expected consumption and lower output is drawing down the inventories accumulated in recent years and helping support prices.

The outlook could reverse again in 2027. If LNG traffic through Hormuz recovers and gas prices retreat towards pre-war levels, the IEA expects global coal consumption to fall 0.4% to 8.91 billion tonnes. Continued disruption would leave more room for coal demand to rise instead.