Coal’s second wind: Why LNG disruption is repricing thermal markets

The global coal market is once again being shaped not by its own fundamentals, but by disruption elsewhere in the energy system. This time, the catalyst is LNG.

A sharp rise in LNG prices – triggered by the Iran War – has reopened the door to gas-to-coal switching across Europe and Asia. The implications are material. Bloomberg Intelligence estimates that between 40 million and 60 million t of additional thermal coal demand could emerge if disruptions persist, dragging seaborne prices higher. For a market often seen as structurally in decline, this is a meaningful reprieve.

However, this is not a repeat of 2022.

Switching is real – but constrained

At first glance, the economics are compelling. Higher gas prices push coal back into the merit order in power systems with existing coal capacity. Yet the ability to switch fuels is far from frictionless.

In Europe, plant retirements, emissions costs, and higher renewables penetration have reduced – but not eliminated – switching capacity since the last crisis. In Asia, LNG contract structures, alongside operational and logistical constraints at coal plants, slow the pace of adjustment.

As a result, fuel switching tends to build gradually over weeks rather than materialising instantly. Still, momentum is emerging, with Japan and Europe already signalling a ramp-up in coal burn.

A tight market gets tighter

Even so, the scale of potential switching is significant. A 40– 60 million t demand uplift equates to 4 – 6% of global thermal coal trade.

The impact is more acute in higher-calorific value (CV) coal, where supply is more limited. In this segment, the same increment represents closer to 10 – 15% of the market – enough to materially tighten availability. This dynamic disproportionately benefits exporters of high-CV coal, particularly in Australia.

Prices rise – but within limits

Coal prices have already moved higher alongside LNG. In a scenario where disruption persists for another one to two months, Newcastle could reach US$165 – 185/t.

Yet expectations should be tempered. The conditions that drove the extraordinary rally of 2022 are largely absent. Then, coal and gas markets were simultaneously constrained by supply shocks. Today, the disruption is concentrated in LNG.

Moreover, structural changes since 2022 – including reduced coal capacity in Europe and already high coal utilisation in parts of Asia – limit the scope for incremental demand.

Margins expand – but costs follow

For coal producers, the near-term outlook is nevertheless constructive. Higher prices translate into strong margin expansion, particularly for miners with direct exposure to seaborne thermal markets.

However, the benefit is not unqualified. Diesel prices – an important cost input – have surged. For some producers, this could cut into a meaningful portion of the earnings upside.

The result is increasing differentiation within the sector. Companies with higher seaborne thermal exposure and stronger cost positions are best placed to capture the upside, while more diversified or higher-cost producers may see a more muted benefit.

A market defined by linkage

What this episode ultimately underscores is the extent to which coal has become a residual fuel in a tightly interconnected energy system.

Coal demand is no longer driven solely by its own fundamentals, but by its role as a backstop when other fuels fail. LNG disruption creates incremental coal demand; its resolution removes it. Even so, the potential for future supply disruptions will raise perceived risk, likely anchoring a higher structural price floor for coal if producers are disciplined.

For mining companies and investors alike, the key question is not just where coal markets are heading – but how long the dislocation in gas markets persists.

In today’s energy landscape, coal’s second wind depends on someone else losing theirs.

Read the article online at: https://www.worldcoal.com/coal/01042026/coals-second-wind-why-lng-disruption-is-repricing-thermal-markets/