A powerful El Nino event is reshaping global coal markets this year, tightening supply from top exporter Indonesia while extreme heat drives up coal-fired power demand across Asia, keeping prices elevated.

The equatorial central and eastern Pacific has entered a strong El Nino state, with monitoring suggesting it could develop into a super event this autumn and winter, potentially the strongest in 150 years, according to the latest data as of Aug 7.

China's National Climate Center said the El Nino condition continued to strengthen during June-July 2026 and is expected to persist through spring-summer 2027, bringing risks of extreme weather including high temperatures, heavy rainfall and typhoons.

On the supply side, drought triggered by El Nino has lowered water levels on inland rivers in Indonesia, severely disrupting barge shipments. On the demand side, heatwaves are boosting coal-fired power demand in major Asian economies, with the combined effect keeping global coal supply-demand balances tight and prices elevated.

Supply contraction - drought curbs Indonesian export capacity

The impact is particularly pronounced in Indonesia, the world's largest coal exporter. Kalimantan and Sumatra, the country's main coal-producing regions, rely on river barges to transport coal to ports for loading.

Severe drought has sharply reduced river levels, with some stretches completely drying up. Rainfall in parts of Kalimantan and Sumatra fell below normal levels in late July, raising market concerns about declining water levels even though no major export disruptions have occurred.

When water levels are too low, barges must reduce loads to avoid running aground, leading to lower cargo volumes per trip, higher unit transport costs, reduced vessel turnover efficiency, longer port loading cycles and a passive contraction in effective supply in the short term. Even with mines operating normally, transport bottlenecks reduce the amount of coal reaching international markets.

Indonesia's coal output reached 367 Mt in January-June 2026, according to the Ministry of Energy and Mineral Resources (ESDM), while exports totaled 232 Mt in the first half, down 5.38% year on year, customs data showed.

Drought intensified in July, with 306 meteorological observation points recording over 60 consecutive days without rainfall, the driest July since 1991. Several institutions forecast that if dry conditions persist, Indonesia's coal output could decline by up to 68 Mt year on year in the second half, tightening spot supply in the global market.

Demand expansion - heatwaves boost Asian coal power demand

Abnormal heat from El Nino has covered multiple major Asian economies, significantly increasing cooling electricity demand from households and businesses.

El Nino weather patterns typically also reduce rainfall in some regions, affecting hydropower and wind generation and constraining overall power supply. The resulting power gap from insufficient renewable output must largely be filled by coal-fired generation.

India's coal-fired power generation reached 114.7 TWh in July 2026, up 13% year on year and surpassing the previous record of 105.8 TWh set in July 2024, according to the Central Electricity Authority (CEA). Cumulative rainfall through end-July was about 15% below normal, with large hydropower generation down 18% year on year to 17.7 TWh due to reduced reservoir inflows, meteorological data showed.

The Centre for Research on Energy and Clean Air (CREA) said in a report in early July that a super El Nino could create an 18 TWh power shortfall in India, forcing greater reliance on coal.

Asia, as the core region for global coal consumption, has seen this power system response directly increase rigid demand for imported thermal coal. Against the backdrop of supply contraction, demand growth has further exacerbated market imbalances. Strong El Nino and other extreme weather patterns raising global temperatures could also hinder the clean energy transition.

Price and market structure changes

Supply-demand pressures have ultimately transmitted to prices. Thermal coal at Qinhuangdao port in northern China was assessed at 844 yuan/t for 5,500 Kcal/kg NAR coal in early August 2026, up 25% year on year, while 5,000 and 4,500 Kcal/kg NAR grades rose 23.8% and 22.6% respectively from a year earlier.

Beyond price volatility, a strong El Nino could trigger deeper market restructuring.

Seaborne coal trade flows may shift. If Indonesian supply remains tight, major buyers such as India, Japan and South Korea could increase purchases from Australia, South Africa and other origins, altering existing trade patterns and potentially raising ocean freight costs and procurement prices.

Regional impacts will differ. In China, El Nino often brings a pattern of flooding in the south and drought in the north. Abundant rainfall in southern regions supports hydropower output, which can offset thermal power demand growth from high temperatures to some extent, giving China's market different supply-demand characteristics from other parts of Asia.

Policy factors could compound the effects. If Indonesia's proposed single coal export channel policy is implemented as planned, it would combine with drought-induced natural reductions to create dual pressure, further increasing supply uncertainty.

Overall, the dual impact of tightened Indonesian supply and expanding Asian demand from the strong El Nino could significantly affect the global coal market in 2026. Transport bottlenecks on the supply side combined with incremental coal-fired power demand are keeping coal prices elevated.

Extreme weather as an external variable can have a substantial short-term impact on global commodity supply-demand patterns. Understanding and adapting to such climate-driven volatility is likely to become a required course for global energy market participants for a considerable period ahead.