Asia's thermal coal demand staged a strong recovery in May, hitting a four-month high, as El Nino-driven heat expectations, rising power demand in key consuming nations and multiple supply-side disruptions pushed prices sharply higher from April lows.

In the Asia-Pacific region, coal's competitiveness as a power fuel strengthened further as summer cooling loads kicked in, compounded by gas-to-coal switching triggered by LNG supply disruptions.

Asia's seaborne thermal coal imports reached 70.80 million tonnes in May, down 6.35% year on year but up 9.69% from the previous month, showed vessel-tracking data from Kpler. January-May imports totaled 340 million tonnes, down 4.01% from a year earlier.

China's seaborne thermal coal imports fell sharply both year on year and month on month in May to 22.07 million tonnes, down 14.54% from a year earlier but up 32.08% from April.

Kpler said China remained the main driver of demand recovery in the Asia-Pacific region. The domestic thermal coal industry has largely recovered from a mine accident on May 22, and demand for imported thermal coal is expected to strengthen in the coming months as seasonal summer heat boosts power consumption.

The World Meteorological Organization (WMO) forecasts an 80% probability of an El Nino event between June and August, pointing to higher-than-normal summer temperatures across most of China, which would lift power demand and coal consumption. Since early June, temperatures in southern China have been above seasonal norms, supporting coal-fired power generation at coastal utilities.

Taiwan's thermal coal demand recovery remained highly dependent on the need for coal as backup for gas-fired power, which is not yet evident. Taiwan imported 4.10 million tonnes of seaborne thermal coal in May, down 1.23% year on year but up 21.99% month on month.

India's thermal coal imports remained weak in May as seasonal factors kept power consumption low. Seaborne imports stood at 12.73 million tonnes, down 31.02% year on year and 5.13% month on month.

Despite record-high power demand from extreme heatwaves in May, Indian power utilities reduced reliance on imported coal due to ample domestic supply and high inventories. A weaker rupee also eroded the price competitiveness of imported coal, while some sponge iron producers increased the blending ratio of domestic coal, further curbing import demand.

India's thermal coal import demand is expected to weaken further from June to September as the monsoon season arrives, bringing lower temperatures and higher hydropower potential. However, El Nino could lead to below-average rainfall, reducing hydropower output and posing an upside risk to import demand.

Northeast Asia was also a key driver of demand growth. Japan's seaborne thermal coal imports rose 12.45% year on year and 1.43% month on month to 7.12 million tonnes in May, while South Korea's imports surged 43.76% year on year and 12% month on month to 5.50 million tonnes.

South Korean power utilities continued their gas-to-coal switching strategy amid high spot LNG prices, and coal demand is expected to keep rising through the summer. Although nuclear power output will gradually recover from September, partially squeezing coal-fired power, coal will still play a key role in peak-shaving and baseload supply during the summer.

Japan's coal-fired power growth potential is more limited. While coal's cost advantage over gas is widening due to persistently high gas prices, Japan's long-term contract flexibility reduces the urgency for large-scale spot LNG purchases, limiting near-term gas-to-coal switching. Higher nuclear output will also offset some of the weather-driven increase in power demand.

In Southeast Asia, Vietnam's thermal coal demand was particularly strong in May. Persistent heatwaves pushed monthly power consumption to a record high, driving seaborne thermal coal imports higher. Vietnam imported 5.46 million tonnes in May, up 0.34% year on year and down 0.98% month on month, the second-highest on record.

Meteorological agencies forecast above-average temperatures in Vietnam through August under the influence of El Nino, providing further impetus for sustained coal import growth.

The Philippines presented a different picture. A magnitude 7.8 earthquake near Mindanao on June 8 caused local power outages and briefly disrupted the 300-MW South Therma coal-fired plant operated by Aboitiz Power Corp, but the plant resumed grid connection within hours. The Philippines imported 3.29 million tonnes of thermal coal in May, down 11.3% year on year and 5.1% month on month.

On the price front, thermal coal prices accelerated from mid-May, driven by expectations of rising summer power demand in China and uncertainty over Indonesia's export policies, pushing major benchmark indices higher. As of June 8, Newcastle June futures broke above $150/t, hitting a 22-month high.

The report noted that with an 80% probability of an El Nino event between June and August, combined with LNG supply disruptions from the Hormuz Strait conflict, Asia-Pacific thermal coal prices are expected to remain elevated throughout the summer.

While European markets led price gains in May, this was largely driven by sentiment factors such as gas price volatility and supply disruptions from Colombia, with limited actual growth in coal demand from the power sector. In contrast, the Asia-Pacific market has stronger pricing sustainability, underpinned by rigid power demand from China, India and Southeast Asian countries.

Overall, Asia's thermal coal market is seeing a shift higher in the price floor, driven by clear demand recovery expectations and multiple supply-side disruptions. Looking ahead to the summer, Asia-Pacific thermal coal prices are expected to remain firm until Indonesia's supply shows a substantial recovery or China's import demand slows markedly. The actual trajectory of El Nino will also be a key variable determining market direction in the coming months.