The big drop is despite the amount of Australian thermal coal exports remaining roughly the same, and is a result of a sharp decline in coal prices due to oversupply - from $US105 per tonne in 2018 to an expected $US72 per tonne by 2021 - and a decline in contracts as importers take advantage of cheaper spot prices, the forecast said.

Office of the Chief Economist acting division head David Turvey warned of "headwinds" facing both the thermal and coking coal sectors as "weak overall demand is expected to keep prices subdued" over the next two years.

And a leading Australian analyst warned the Hunter will feel the consequences of those "headwinds" in the form of job losses.

"The Hunter Valley will ultimately be hit by reduced employment. You don't have a 30 per cent fall in prices without a concerted effort by the companies to share that pain with the workforce," said Institute for Energy Economics and Financial Analysis analyst Tim Buckley.

"The merger of Glencore/Yancoal/Rio Tinto operations provides an ongoing consolidation process, and now the heat has gone out of pricing, the management there will renew their focus on cost rationalisation i.e. workforce reductions," he said.

The warnings came only weeks after the NSW Minerals Council said "strong demand" for NSW coal was driving up jobs in the Hunter.

The quarterly Office of the Chief Economist forecast released this week revised projected export earnings down further from the June report because of a "faster-than-expected" decline in the benchmark thermal coal price over the past three months.

The revised export figure is also due to BHP announcing production at Muswellbrook's Mount Arthur coal mine could fall by up to a fifth by June, 2020 as it responds to a changing global market.

BHP will reduce overall production to focus on higher-grade coal for sale in Japan and South Korea to achieve higher unit prices and reduce its exposure to the volatile Chinese market. But the move also includes higher per-tonne costs.

The Office of the Chief Economist warned that "weak demand has placed downward pressure on the thermal coal price" while at the same time "large volumes of thermal coal have entered the seaborne market since 2018, resulting in an oversupplied market".

While a "gentle recovery" in the thermal coal price is expected in the longer term, there are "several risks", the forecast warned.

"Developments in China's import policies and domestic coal markets are likely to drive ongoing volatility in thermal coal imports and prices," the forecast said.

It noted the impact of "growing challenges for coal projects in Australia and around the world, particularly for thermal coal".

"There is a growing reluctance to commit to greenfield projects, and an expanding list of lenders have announced they will no longer finance thermal coal projects. Pension and equity funds are also divesting from coal, community opposition is growing, and challenging regulatory conditions are also impacting on investment decisions," the forecast said.

The Office of the Chief Economist forecast an even steeper drop in export earnings for coking coal - required in steel making - from $44 billion in 2018-19 to an expected $35 billion by 2020-21, despite an increase in projected exports from 183 million tonnes to 198 million tonnes over the same period.

New coking coal entering the global market from Queensland's Bowen Basin and increased supply from Russia and Mongolia contributed to a "sharper than anticipated" decline in the price per tonne. And while strong demand from India and an emerging Asia is expected to help put a floor under coking coal prices, the Office of the Chief Economist warned that the pace at which India's steel sector is able to expand remains uncertain.

Institute for Energy Economics and Financial Analysis said the new forecasts showed strong criticism by the NSW Minerals Council and NSW Deputy Premier John Barilaro after the proposed Bylong coal mine between Denman and Mudgee was refused was "way off the mark".

The Minerals Council and Mr Barilaro said the Independent Planning Commission's rejection of the proposed new mine could impact on royalties for schools and hospitals and on future growth in coal exports to South Korea.

But IEEFA analyst Simon Nicholas said the decline in the global seaborne thermal coal market would affect royalties to the NSW Government, not rejection of the Bylong mine.

"With the market oversupplied, coal prices falling and the value of Australian thermal coal exports declining, rejecting new greenfield coal mines makes economic sense," Mr Nicholas said.

"No new thermal coal mines means reduced oversupply and lowering pressure on coal prices which may actually help protect mine royalties in the long term."

The Office of the Chief Economist said South Korea, which represents 15 per cent of Australia's thermal coal export market behind Japan (45 per cent) and China (16 per cent), was expected to continue reducing its coal imports to 2021.

"Since the change in government in 2017 South Korea has implemented a range of measures and regulations to reduce the country's reliance on coal-fired power generation," the forecast said.

"These include a change in taxes from April 1, 2019 to encourage a move away from coal and towards gas, temporarily closing older plants when the air quality is poor, the cancellation of new coal-fired power plant capacity and plans to close several ageing power plants."

Australian thermal coal exports to South Korea peaked in 2015 and "the Office of the Chief Economist clearly understands South Korea has entered an energy transition away from coal and towards renewable energy and liquefied natural gas", Mr Nicholas said.

Eighty per cent of the volume and 70 per cent of the value of Hunter coal exports is in thermal coal. Mr Buckley said revenues and profits will be squeezed on both thermal and coking coal in the coming two years, while NSW and Queensland would feel the sting.

"More than 80 per cent of coal mines in Australia are foreign owned, and as a result the corporate tax impact on the Federal government is material, but still muted. The NSW Government royalties are a straight percentage of revenues, so the NSW and Queensland budgets will be more materially impacted by flat, at best, volumes and the decline in unit prices," Mr Buckley said.

"While the industry would respond by saying the NSW Government should approve new mine development to spur increased volumes and hence revenues, that ignores the fact that global seaborne demand is flat-lining.

"Asian countries like Vietnam, Malaysia, Taiwan and South Korea are all rapidly accelerating their investments in solar, and increasingly offshore wind, so as to diversify their energy sources while at the same time delivering a greater domestic supply and improving energy security.

"As solar and wind price deflation is still running double digits annually, the competitiveness of imported thermal coal is increasingly being eroded. The latest Malaysian and Vietnamese solar tenders resulted in prices equal to or below new imported coal fired power plants, so I expect an acceleration of deployments similar to what has happened in India over the last three years."

The Office of the Chief Economist noted imports of thermal coal in India had grown in the first half of 2019, although India represents only 1 per cent of Australia's exported thermal coal market.

While the Indian Government is aiming for self-sufficiency in thermal coal, with the state-owned Coal India Limited targeting production of 1 billion tonnes by 2025-26, there are considerable barriers to achieving the goal, the Office of the Chief Economist said.

"The pace of India's domestic output growth will be the key driver of its future import needs. While imports are forecast to remain high in the short term, there are more uncertainties in the longer term," the forecast said.

South East Asian countries represented one of the few potential growth areas for thermal coal markets, driven by new and planned coal-fired power plants. While individual countries were relatively small importers, collectively the region is the fourth largest thermal coal importer in the world, the forecast said.