(Montel) A tightening Asian market continued to support European coal contracts this week, though analysts said on Thursday a gas price slump could wipe out a sizeable chunk of power sector demand, potentially stemming recent API 2 bullishness.
The Q4 API 2 contract was last seen at USD 61.4/t in the current session, just 0.2% below the close one week ago, while the Cal 17 fell 2.4% week on week to USD 57.30/t.
On the physical market, prices were better supported, with the Global Coal Des ARA {Amsterdam, Rotterdam or Antwerp) index last assessed at USD 61.72/t, up by USD 2.58 week on week.
A tightening Asian market continued to filter into European prices, said traders, highlighting in particular restrictions on domestic production by Chinese regulators.
“The recent heatwave in the Far East combined with lower coal output in China, the rise in oil prices, the weakening of the dollar against the euro and the appreciation of miners’ currencies are the bullish drivers for API2,” said Nena analyst Diana Bacila.
“Colombian coal is still pricing in India and Far East, while US coal from the East Coast is not currently pricing in Europe, which remain positive drivers for API 2.”
The Chinese government in April reduced the number of days that mines can operate per year by 16% to 276, triggering a 6.7% rise in coal imports in the first seven months of the year, to 129.3m tonnes.
The constraints meant there was now “support [for] global [coal] prices for the foreseeable future”, said investment bank Goldman Sachs in a report this week that lifted the bank’s three, six and 12 month price forecasts for Newcastle coal to USD 65/t, 62/t and USD 60/t, up as much as 38% from its previous outlook.
The Global Coal daily Newcastle (Australia) index was last assessed at USD 68.81/t, up by 2.8% on the week. On Monday it peaked at USD 69.32/t, the highest since February 2015.
Weak European demand
However, weak European demand could stem support for coal, with gas prices in Germany now trading at around coal-to-gas switching levels, said players.
“More gas plants are now able to compete over coal, which if sustained, will be negative to European coal prices this autumn,” said Bacila.
The coal-to-gas-switching level in Germany is currently pegged at around EUR 12/MWh, said Alan Richards, an analyst at energy consultancy Utilyx.
“Dropping below this level would significantly increase the outlook for gas demand from the European power sector,” said Richards, noting that around 20 GW of CCGT capacity in northwest Europe was currently idled or mothballed.
Day-ahead gas prices at the German NCG hub were last seen at EUR 11.70/MWh, down from above EUR 15/MWh in late July, according to broker data.
“Moreover, as we enter the shoulder demand season, temperatures will cool down in Asia, thus coal demand will seasonally decline, easing the current tightness,” said Bacila.
Reporting by:
James Allen
james@montel.no
23:53, Thursday, 18 August 2016