Nena News

COAL – Open US export arbitrage threatens to cap API 2 gains

(Montel) European coal prices rose to eight-month highs on Thursday largely on the back of a bullish oil market, although an opening of the US export arbitrage to Europe threatens to curtail further gains, said players.

The front-quarter API 2 coal contract last traded on Ice at USD 50/t, up 4% week on week and the highest level since 21 September, while the Cal 17 gained 3% to a latest trade at USD 48.40/t. 

Earlier on Thursday the benchmark contract hit USD 48.80/t, the highest since 12 October.

On the physical market, the Global Coal Des ARA index – an Atlantic benchmark – rose 2% to 49.25/t.

“Higher oil prices and tighter supply in the Atlantic, as high volumes of Colombian coal found their way into Asia, have been offering support to coal prices in Europe,” said Nena analyst Diana Bacila.

The front-month Brent North Sea crude contract rose above the USD 50/bbl mark for the first time since November on Thursday, before last trading at USD 49.40/bbl. 

Coal prices were also reacting to an appreciating Russian ruble against the US dollar, which was 3% stronger on the week, market players said.

“We think coal in Europe is fairly priced at the moment, considering current oil prices and the currency values seen by Atlantic coal miners,” said Bacila.

US coal export arbitrage

Indeed, the bullish European market had started to provide opportunities for US exporters to place cargoes in Europe, potentially capping significant further upside, she added. 

The arbitrage window for shipping US coal to Europe has been largely shut since early 2014 due to a challenging US domestic market, low international coal prices and higher dry bulk freight rates.

“These higher prices have brought something new and now we see US coal starting to price in Europe,” said Bacila.

“If this arbitrage sustains, Russian and Colombian miners will start facing competition in the Atlantic, which may depress the API 2. Also current price levels will invite other miners to return to the market, limiting a strong upside.”

However, front-year prices hitting USD 50/bbl remained a “real possibility”, said a trader.

“Overall there’s bullishness in the market, if you look at oil prices and the also the recently announced production cuts,” he said.

“Longer-term we could see prices in the USD 56-60/t range, which should be a level where the market is balanced.”

In the meantime, oil remained a “major driver” and its correlation to coal will drive API 2’s volatility, said Bacila.

Reporting by:
James Allen
22:17, Thursday, 26 May 2016