(Montel) European coal prices began to show signs of consolidation this week, with firmer crude oil prices credited with the rally as there is little sign yet of an uptick in regional demand.
The GlobalCoal Des ARA index dropped to its lowest in at least three years on Tuesday, reaching USD 43.11/t, while the Ice Futures Cal 17 API 2 contract hit a record low of USD 36.55/t on the same day.
On Wednesday, however, the Cal 17 moved higher and was last seen at USD 38/t, its highest level in 10 days.
“Fundamentally nothing has changed,” a London-based trader told Montel. “But with stronger oil and gas and short-covering it’s better bid.”
Rising oil
The front-month contract for Brent crude North Sea oil was trading above USD 35/bbl for the first time in two weeks, while at the same time producer currencies, in particular the Russian ruble and South African rand, have steadied against the US dollar after eight months of declines, providing a floor for export prices.
“With the current oil price, freight and forex, I see USD 43/t as a floor price for coal for the front month and quarter at the moment,” Diana Bacila, an analyst at Oslo-based Nena, told Montel. “I’d say there is a limited downside at the moment.”
The March contract closed on Wednesday at USD 43.55/t on Ice.
As March approaches, temperatures are expected to turn milder, dampening demand for power generation, while German wind generation is also expected to increase, she added.
Stockpiles at generators are comfortable, with high Rhine river levels allowing full barge loads to move from Rotterdam, she said.
Bottoming out
Andy Sommer, senior analyst at Axpo Trading, said the market is not far from the lowest level of the current cycle.
“Not because we are bullish on fundamentals – we still see weak demand and oversupply – but we believe that oil prices are near their bottom and will stabilise in the weeks ahead,” he told Montel.
South African prices, meanwhile, have rallied slightly after declines in early February as supplies are said to be slightly tighter than normal. The GlobalCoal index for Richards Bay was assessed at USD 52.36/t on Wednesday, the highest since the end of January.
The most important factor likely to affect Atlantic Basin prices in the coming weeks is the outcome of Colombian miners’ salary negotiations, Bacila said.
“Normal negotiations end on February 20, with a further 10 days to decide whether to go on strike,” she said. “If a strike were to take place, the result would be that the market would seek Russian and US coal, as South African material is too expensive.”
A Colombian miners’ strike is the biggest risk to the market, she said.
“This could shift the whole picture two weeks from now,” Bacila said, though she added a strike was not currently being priced into the market.
Asia-Pacific picture
The Pacific Basin market has yet to see a significant uptick in activity after the recent Chinese holiday, trading sources said.
However, with annual contract negotiations between Japanese buyers and Australian suppliers currently under way, there is scope for some volatility in prices, said a trading source.
The GlobalCoal Newcastle index was pegged on Wednesday at USD 51.78/t, representing a 2.2% gain from a week earlier, the biggest seven-day rise since September.
Shipments from the key Australian export terminals have been affected by heavy rainfall, the trading source said, while Indonesian shipments have recently experienced some weather-related interruptions as well.
At the same time, demand in key import markets continues to decline. Chinese coal imports fell 13% in January, according to customs data. The country bought 15.2m tonnes of foreign coal last month, compared with 17.6m tonnes in December.
India too is reportedly cutting imports as domestic production advances. Coal secretary Anil Swarup was reported on Wednesday as saying imports have already declined by 16% year on year as the country cuts purchases of coal grades that are readily available in the domestic market.
Asian economies from India to China have been reporting worse than expected economic data in recent weeks, Axpo’s Sommer said, which suggest electricity and coal demand will not be as strong as previously hoped.
The policy environment is growing increasingly difficult for coal in Asia, in the wake of the Paris climate summit in December, he said.
“They are not turning against coal as such but they are becoming more open-minded towards other forms of energy. Our medium to long-term view is that we might see further declines in demand.”
Reporting by:
Alessandro Vitelli
newsdesk@montel.no
17:09, Thursday, 18 February 2016