Nena News

COAL – Dollar weakness, weak demand to shackle API 2 prices

(Montel) European coal prices are likely to trade relatively sideways over the short-term with downside constrained by weakness in the dollar and upside limited by waning European demand, participants said on Thursday.

The Cal 17 API 2 contract was up by 2.7%, week on week, to USD 42.40/t, approaching the 2016 high of USD 42.70/t reached on 21 March. 

“We see limited downside to coal prices in the short-term, if oil prices continue holding close to USD 40/bbl and the dollar continues weakening against miners’ currencies, especially the Rouble and the Colombian Peso,” said Diana Bacila, an analyst at Oslo-based energy consultancy Nena.

“These drivers are lifting coal production costs for miners in those countries, which are the biggest two coal exporters to Europe.”

The front month Brent North Sea oil contract was last seen at USD 39.69/t on Ice.

The Russian ruble had strengthened by around 9% from the same time last month to around 67 against the US dollar, at the time of writing.

A weaker US dollar – for Russian producers – reduces the attractiveness of dollar-linked coal exports, resulting in some reluctance to offer cargoes, and therefore some potential reduction in supply.

Although the recent upside in coal had likely been caused by news of production cuts in China, the market was still fundamentally oversupplied, a trader said. 

“There is still too much coal around, but the market has not been trading with that in mind for a month or so now,” said the Scandinavia-based trader.

“March is the first bullish month we have had since last June. So I guess no one expects a lot more upside in the coal market, and it will correlate with oil no doubt.”

Indeed, any potential upside for API 2 was limited as demand from major EU coal consumers is weakening due to less coal power capacity remaining online, Bacila added.

“Coal consumption in Europe will fall going forward amid the latest coal-fired plant closures in the UK this month, which account for around 6 GW. This may slash around 6-7m tonnes of thermal coal burn in the UK for the rest of 2016,” said Bacila.

Coal-fired plant closures in Q1 meant UK coal burn had already fallen by 6m tonnes, or 71%, year on year, totalling only 5.71m tonnes, contributing to a 9m tonne, or 89%, year on year drop over Q1 to 27m tonnes in the major EU 7 countries, she added.

Traders were also eying Chinese economic data for March that would provide a clearer indication on the impact of recent policy measures to stimulate growth, said Adrian Lunt, assistant vice president for commodities at Singapore Exchange (SGX).

“Longer term, structural cost deflation in the Chinese coal industry may act as a further headwind to the seaborne market,” Lunt added.

China’s premier Li Keqiang announced in early March a 2016 growth target range of 6.5-7%, higher than many international economists had forecast.

Any related step-up in Chinese coal import demand could have ramifications for the global coal market.

Reporting by:
James Allen
20:22, Thursday, 31 March 2016

Reporting by:
Laurence Walker
20:22, Thursday, 31 March 2016