The disruption to global energy markets caused by the conflict in the Middle East has triggered an unexpected resurgence in coal demand, as energy security fears outweigh Climate Crisis commitments.

Coal prices and consumption both rose following disruptions to natural gas supplies from the Gulf, reversing expectations that global coal demand had entered a sustained decline, according to a World Bank blog by economists Paolo Agnolucci and Nikita Makarenko.

Australian benchmark thermal coal prices climbed to almost $150 per tonne in early June, driven by supply disruptions in China, uncertainty over Indonesian exports and rising seasonal electricity demand before falling sharply after the announcement that military operations in the Middle East had ended.

The rally began earlier in the year. Prices rose by around 20% month-on-month in March as fighting in the Gulf broke out, disrupting natural gas shipments that forced utilities throughout Asia to switch back to coal-fired generation which they keep in reserve.

As the war in Iran intensified and the Strait of Hormuz remained closed, coal prices remained elevated throughout April and May.

As IntelliNews reported, most countries keep significant coal-fired power generation capacity in reserve for energy supply emergencies, and the Gulf war has been “the worst energy disruption in history” according to Goldman Sachs.

Germany produces the most power using coal in Europe: 40GW with another 20GW, or 30% of the total generating capacity, in reserve giving it a big buffer to cope with gas price spikes. The former socialist countries of Poland, Czechia and Bulgaria depend more heavily on coal, which accounts for between 35-50% of their total generating capacity. The UK is the only country with none, having closed their last coal-fired power station in 2024.

The story is similar in Asia. China has been trying to wean itself off coal, but with economic growth running at over 6% for a decade, the process is going slowly. India still relies on coal for 75% of its energy needs, although it has also rapidly accelerated its roll out of renewables.

Despite years of investment in renewable energy, coal remains a fallback fuel whenever gas markets tighten. And Qatar’s LNG, one of the three biggest suppliers, was taken totally off the market after the Ras Laffan LNG complex was hit by Iranian missiles.

The World Bank expects global thermal coal demand to remain broadly unchanged in 2026 after edging higher in 2025, with stronger consumption in Asia offsetting continued declines in Europe.

Coal consumption mmt
	2024	2025	2026
China	72	-7	9.9
India	60	-21	44.2
US	-41	37	-18.5
EU	-12	-3	-31.8
Rest of the world	34	22	-0.8
source: World Bank

Demand side up

The war in Iran is expected to have a knock-on effect and keep demand for coal higher for longer, while slowing the decommissioning of coal-fired plants, as countries seek to diversify their power generating capacity with more renewable investments, according to the World Bank.

The largest increases are expected in China and particularly India, where governments are expanding domestic coal production to improve energy security and reduce dependence on imported fuels.

China's new five-year plan for the energy sector prioritizes energy security and has left room for coal consumption to grow, despite its heavy emphasis on expanding renewables. The new plan strengthens coal's role as a backstop for the energy system and gives a green light to further growth in the coal-to-chemicals industry. The goal of getting 50% of power from clean energy still allows fossil fuel generation to increase 10% over the period, according to the Center for Research on Energy and Clean Air.

“We will always prioritize energy security,” Wang Hongzhi, head of the National Energy Administration, said at a briefing to introduce the country’s new five-year plan for the sector, Bloomberg reports, crediting the strategy for allowing China to successfully withstand the supply shock caused by the Iran War.

Construction of new coal-fired power plants has boomed since a spate of electricity shortages in 2021 and 2022 as Beijing touts coal as a key back up source of energy. The country’s coal-to-chemicals sector has also grown rapidly in recent years, due to lobbying by the powerful mining lobby, which is keen to maintain demand for coal as renewables eat into its use as fuel.

In contrast, coal consumption in the European Union is expected to continue falling, although at a slower pace than before the Middle East conflict. US demand is forecast to remain broadly stable after increasing by 10% last year, supported by stronger electricity consumption driven partly by rapidly expanding AI data centres and substitution away from more expensive natural gas.

China and India, the world's two largest coal consumers, largely avoided stronger demand growth in 2025 thanks to record expansion in solar, wind and hydropower generation. However, both countries continue to treat domestic coal production as a strategic energy security asset.

Supply side down

On the supply side, global thermal coal production changed little in 2025 and is forecast to decline by around 1% this year while remaining sufficient to meet demand.

Production growth in China, North America and Eurasia last year offset lower output in Australia and Indonesia, the world's two largest exporters. Both China and India have accelerated efforts to replace imports with domestic production, a shift the World Bank suggests could become permanent and leave exporters facing structurally weaker international demand.

Indonesia is expected to reduce production further in 2026 under lower official output targets, contributing to a decline in Asia-Pacific exports. European coal production continues to contract, while US output is expected to remain broadly unchanged.

International coal trade is forecast to weaken as Indonesia restrains exports. At the same time, diesel shortages and sharply higher diesel prices resulting from the Gulf conflict have increased mining costs and, in some cases, constrained production.

Despite the recent correction, the World Bank expects Australian benchmark thermal coal prices to average about $130 per tonne in 2026, roughly 20% higher than the previous year, before easing by around 12% in 2027.

That outlook assumes lingering disruption to Middle Eastern gas supplies keeps coal competitive as a substitute fuel, particularly across Asia and Europe.

Upside risks remain

The report says upside risks remain significant. If gas exports through the Strait of Hormuz recover more slowly than expected, coal-fired power generation could remain elevated for longer. At the same time, rapidly growing electricity demand from artificial intelligence infrastructure could prompt utilities in China and the United States to keep underutilised coal plants operating for longer than anticipated.

Conversely, stronger renewable generation—particularly if the rapid expansion of solar and wind power in China and India seen during 2025 continues—or a larger-than-expected recovery in Indonesian exports could place downward pressure on coal prices.

The findings illustrate how geopolitical shocks continue to reshape the global energy transition. While long-term investment remains focused on renewable energy, periods of supply disruption continue to demonstrate that coal remains an essential balancing fuel in much of the world's electricity system.

For policymakers, the report offers a reminder that energy security considerations continue to outweigh climate objectives when fuel markets come under stress. For coal producers, however, the recent rebound may prove temporary if renewable deployment resumes its rapid pace and natural gas markets stabilise following the reopening of the Strait of Hormuz.