Nena News

MONTHLY – USD 50/t coal may see upside from Indian monsoon

(Montel) European paper coal prices will likely continue to remain around USD 50/t in June, although the impending monsoon season in India will almost certainly be bullish for prices, a market participant said.

The Q3 API 2 contract closed on Tuesday, the last day of May, trading at USD 50.85/t, up 9.2% from the end of April, while the Cal 17 rose by a less pronounced 7% to USD 49.95/t, Ice data showed.

Both contracts ended May trading at their highest levels since September.

On the physical market, the Global Coal Des ARA index rose 9.8%, month on month, to USD 50.52/t.

“We assess coal prices may sustain or even slightly gain from current levels as Far East buyers are restocking ahead of the cooling season, oil prices lift miners’ production costs and coal supply continues tightening around the globe,” said Diana Bacila, an Oslo-based analyst at Nena.

“One potential bullish driver comes from China, where coal output continued falling in April after mines were ordered to reduce working days and operate at 84% of their capacity,” she said.

“Combined with low inventories at ports and plants, this has helped stabilising domestic coal prices in China and coal imports. But hydropower generation has cut thermal power demand since the start of the year and its development remains the major risk this summer.”

The front-month contract for Brent crude North Sea oil rose was last seen at USD 49.46/bbl, having risen to a seven-month high of USD 50.51/bbl on 26 May.

“I would expect that this strong influence of oil into coal prices continues over the next few weeks or months,” said Andy Sommer, senior analyst at Axpo Trading.

Monsoon season
However, the severity of the monsoon season in India, which starts in June, would likely determine European prices, he said.

“If it’s fairly normal or even stronger than normal, it brings a lot of rain, replenishing the low river, and then it’s bearish on coal demand going forward. If precipitation is below normal, then hydro generation will remain below normal, and we’ll need more coal than usual,” Sommer added.

However, the monsoon will almost certainly be bullish for prices as it could shut India’s open-cast coal mines, limiting production, said Andrey Shubin, a Norway-based analyst at SKM Energy.

However, the expansion of the Panama Canal, slated for the end of the month, could also further widen the recently-opened arbitrage to send cargoes from Colombia to Asia, potentially lifting European prices, said Sommer.

“But my best guess currently is that we are going to see fairly stable prices over the month with the weather hard to predict, and with a slight negative, bearish tendency in oil.”

Shubin, too, had a “neutral” outlook in June, with prices likely to remain closely tied to the rest of the commodity complex.

“The market is still quite loose so it’s hard for coal to decouple from the rest of the complex. When we start seeing real tightness, then that’s when we might see decoupling.”

Uptrend to continue

From a technical perspective, the outlook was bullish, said Tom Høvik, head of Montel’s technical analysis services.

“Heading towards the lower USD 53-zone next month [June] is on the technical cards,” said Høvik.

Indeed, prices would likely continue their oil-linked uptrend, agreed a Finland-based trader. 

“Some analysts are already predicting that the API 2 market will weaken because we have already risen too much and that the closure of mines has halted,” he told Montel.

“But they said the same about oil and yet prices have now risen to around USD 50/bbl. So, for coal, I predict we should see more upside.”

Reporting by:
James Allen
07:53, Wednesday, 1 June 2016