(Montel) European paper coal prices may rise by as much as 6% – or about USD 3 – from current levels in May, as bullish technical signals and strong oil prices underpin the market, participants said.
The Q3 API 2 contract was last seen at USD 47.10/t, up 6.2% from the end of March, while the Cal 17 rose by a more pronounced 11% to USD 47.05/t – much in line with the previous month’s gain – Ice data showed.
Both contracts peaked at their highest levels since early November of USD 47.50/t and USD 47.80/t on 19 and 26 April, respectively.
But on the physical market, the Global Coal Des ARA index fell 3.8%, month on month, to USD 46.07/t – its lowest level since 8 April.
USD 50 level?
Following bullish indications for the Cal 17 contract at the end of February and March, there was a “continued ‘buy’ signal” in April, suggesting prices could rise to around USD 50/t in May, said Tom Høvik, head of Montel’s technical analysis services.
“One technical trigger for entering the USD 50 zone would be to experience a break above USD 48.20/t,” he said.
Aside from technical drivers, the gains also reflected stronger oil prices, said a Nordic coal trader.
“I am not expecting coal to move straight up but I see improved fundaments and buying interest now starting to materialise,” he said.
The front-month contract for Brent crude North Sea oil rose to a year-to-date high of USD 48.50/bbl in the current session.
At the same time, an appreciating ruble against the US dollar was likely to deter Russian exporters from parting with cargoes, therefore proving supportive for prices.
The ruble was last pegged around 64 against the greenback after weakening to a record 82 in January, according to XE.com.
“Russian miners’ income in rubles has been shrinking, thus they are asking for higher dollar-denominated coal prices,” said Diana Bacila, senior analyst at consultancy Nena.
Rising supply
But despite the somewhat bullish sentiment on the derivatives market, physical demand was likely to lessen in the coming weeks, while there may be increased supply in the Atlantic basin as the Colombia-Asia arbitrage closes, participants said.
“Most countries in Europe are burning less now and supply and demand is balanced,” said a commodities analyst with a trading house, citing in particular a reduction in UK coal-fired generation capacity.
Indeed, UK coal imports in February plunged 73% year on year to a 20-year low of 961,000t, as generators burnt just 2m tonnes of coal, down 45% year on year, Montel reported.
“In Europe, weak demand in winter, which resulted in a healthy inventory levels, combined with ongoing climate and energy policy, has put further pressure on coal demand,” said Serene Lim, energy analyst at Standard Chartered.
Closing arbitrage
The market had garnered some support in recent weeks from a slight tightness in nearby physical offers, notably from Colombia.
Colombian exporters had been taking advantage of low freight rates and relatively high South African export prices to sell material into the Asia-Pacific market.
But with the Baltic Dry Index – which tracks global dry freight rates – surging 65% this month, such opportunities are diminishing.
“In the last week or so, we have seen freight rates move higher. This has narrowed and, for some destinations, closed the Colombian arbitrage,” said Howard Gatiss, chief executive of CMC Marketing, the sole marketer of exports by Colombia’s largest producer, Cerrejon.
“Thus short term, with the Indian monsoon approaching, it’s unlikely we will see the same amount of volume being delivered as we have seen so far this year,” he said, adding some 3.5m tonnes of Colombian coal was sold to Asian customers in the first four months of 2016.