UBS has flagged the risk of a “super El Niño” developing from mid-2026, which it says could tighten the seaborne thermal coal market and push prices higher, with Indonesian and Australian producers set to benefit.
The World Meteorological Organisation expects an El Niño event to develop in the coming months, and some scientists predict it could be the strongest this century based on high Pacific Ocean surface temperatures.
UBS said such events typically trigger intense and prolonged heatwaves across Asia, where coal-fired plants account for roughly 70% of electricity generation in India and around 55% in China and across the region more broadly.
Higher demand for air conditioning should lift overall coal consumption and coal imports, while in Latin America and Africa, changes to rainfall patterns associated with El Niño can reduce output from hydroelectric dams, which provide a significant share of generation in both regions.
With global power systems already under strain from the US-Iran conflict, UBS sees a risk that the weather event could compound existing supply pressures.
The broker noted a potential constraint on Indonesian supply from new export quotas, though feedback from a recent industry tour suggested authorities are willing to approve additional quota allocations following recent price rises.
On iron ore, UBS said March quarter shipments from the major producers were broadly resilient and generally in line with or modestly ahead of expectations despite weather disruptions, with Rio Tinto Ltd (LSE:RIO, ASX:RIO, OTC:RTNTF), BHP Group Ltd (LSE:BHP, ASX:BHP), Anglo American PLC (LSE:AAL) and Vale all delivering solid operational performances.
Fortescue was more mixed, with solid haematite shipments offset by disappointment at its Iron Bridge magnetite project, leading to a guidance downgrade.
Iron ore prices have risen to $112 per tonne, supported by higher freight rates, with Australia-to-China shipping costs up $5 per tonne since the end of February and Brazil-to-China routes up approximately $11 per tonne.
Chinese port inventories remain close to all-time highs at around 160 million tonnes but have started to fall seasonally, while steel exports lifted month-on-month in April.
UBS holds neutral ratings on BHP, Rio Tinto, Vale and Fortescue, and estimates spot 2026 free cash flow yields of 5% for BHP, 9% for Rio Tinto and 11% for Vale.
