(Montel) European coal prices will take direction from weather-related developments over the coming month and could retest eight-month highs hit last week, although the current supply demand outlook appears relatively balanced, participants said on Monday.
The front-year API 2 contract hit an eight-month high of USD 70.85/t last week but was more likely to remain range-bound between the recent USD 68-70.50/t levels in July, players said.
The front-quarter API 2 contract ended last month at USD 77.12/t, up 4.8% from April’s close, while the Cal 18 contract was 5.4% higher at USD 70.21/t.
On the physical market, the Global Coal Des ARA index was assessed on 30 June at USD 79.81/t, up 3.2% month on month, while the Asia-Pacific benchmark Newcastle index was 11% higher at USD 82.46/t.
Yet, European physical trading activity declined sharply in June, with just two cargoes for delivery in Amsterdam or Rotterdam trading via broker Global Coal, compared with 40 in the same month last year.
“The weather in Europe is going to play a major role [in July],” said a dry bulk strategist at a large European trading firm, adding “bearish weather” at the end of June – with high wind power generation levels and cooler temperatures – had “broken the bullish trend” for both coal and gas.
“Depending on what the weather will do, utilities may end up building up some stocks, or not,” he said.
“Coal prices will be highly dependent on weather developments in the northern hemisphere, with hydropower output and heatwaves in China and Europe as main demand drivers,” said Diana Bacila, senior analyst at Oslo-based Nena.
“[Furthermore] gas is closely competing with coal in Europe, the US and the Far East, so movements in gas prices will impact coal markets directly,” she said, noting both fuels will be “highly impacted” by how the cooling season develops.
Weather driven
“Prices are at the high end of the justifiable range right now and I only see further upside if the weather proves to be supportive for coal,” said Andy Sommer, senior analyst at Axpo Trading.
“Most important is China, of course, although India is increasingly significant,” he said, adding India’s June-September monsoon rains appeared to be somewhat below normal levels this year.
“This creates demand for coal and the question is whether [state-owned coal monopoly] Coal India can meet this demand, especially with stocks already low."
Coal inventories at 110 of India’s coal-fired plants, monitored by the country’s Central Electricity Authority, were last pegged at 17.1m tonnes, around 14m tonnes lower than at the same time last year.
“There will be some demand from China in July, as stocks are still quite low,” he said, adding potential shortfalls in water supply for China and Europe could spur demand, as coal-fired units compensate for a lack of hydropower generation.
China import ban
Meanwhile, China has temporarily banned coal imports via small ports as of this month, until 31 December.
Most ports in Fujian, Guangdong and Guangxi provinces are affected, with a total of eight ports not allowed to accept any imported coal and one only permitting coal imported from China flag vessels.
“There is no consensus in the market at this stage on the impact, with figures ranging from 5m to 50m tonnes lower imports in the second half, versus what it was likely to have been otherwise,” said the dry bulk strategist.
“While a 5m-tonne impact would basically leave the balanced global supply and demand situation intact, anything significantly higher than that would eventually help to build up a surplus in Asia that could have global consequences in terms of price levels,” he said.
“The import ban can lead to a marginal increase in domestic coal prices, which should ignite more coal production,” said Nena’s Bacila, adding “on the international market, the ban can have a mild negative impact, or more likely limit further upside, until coal supply improves in both basins”.