Nena News

MONTHLY – Weak demand to weigh on coal prices

(Montel) European coal prices are likely to remain flat or weaken marginally over the coming month amid seasonally weak demand and bearish signals from the Asia-Pacific region, although technical indicators are still bullish.

“No one doubts the market is weak, and it’s not expected to strengthen in the next couple of weeks,” said an analyst with a European utility. “July is the holiday season, so there is not usually much going on.”

Yet the market remained vulnerable to broader macroeconomic developments and currency fluctuations following the UK’s surprise 23 June vote to leave the EU.

“The most significant impact is on exchange rates. A stronger dollar is usually a rather bearish influence for the [dollar denominated] coal market, and this is coupled with weak fundamentals,” the analyst said.

The Q3 API 2 contract ended June at USD 55.75/t, up 10% month on month, while the Cal 17 rose by 12% to USD 55.63/t, Ice data showed.

The contracts reached year-to-date highs of USD 60.30/t and USD 59.50/t, respectively, on 20 June.

On the physical market, the Global Coal Des ARA index rose 6%, month on month, to USD 53.56/t, albeit marginally lower than the seven-month high of USD 55.43/t achieved on 20 June.

Bearish factors
The European coal market “might actually hold onto these levels, or there could be a drop”, said Diana Bacila, senior analyst at Oslo-based Nena, pointing to a number of bearish factors on the global market.

“Chinese hydropower generation remains strong, due to heavy rain in the region,” she said, noting this was likely to limit coal import demand.

And an improvement in the weather for the world’s largest thermal coal exporter, Indonesia – where heavy rains have hampered production and exports in recent months – could trigger greater export volumes, she said.

The number of coal-laden vessels leaving Indonesian ports last week nearly doubled from the year-to-date weekly average of 85-88 to some 120 vessels.

Furthermore, a closed arbitrage from Colombia to Asian destinations was likely to result in more abundant Atlantic supply, participants said.

“We won’t see the support for prices we’ve seen in recent months from Colombian coal going to Asia,” said Bacila.

But this may not necessarily have an immediate bearish impact, said Howard Gatiss, chief executive of CMC Coal Marketing.

“I don’t see the end of the arbitrage into Asia as having a negative effect on prices through supply-demand. Indeed, the fact that a significant volume of coal has gone from the Atlantic to the east has reduced supply and affected inventories,” he said.

Indeed, this week, combined coal stocks at north-west four key European dry bulk terminals fell 55% year on year to a fresh multi-year low of 2.8m tonnes.

Coal burn

Meanwhile, a drop in EUA prices in the wake of the Brexit vote could encourage higher European coal-burn levels, said the utility analyst, regarding the support this would provide for clean dark spreads – the profit margin for burning coal to producer power, which includes the price of carbon.

European carbon prices fell to their lowest levels in two years this week.

And from a technical viewpoint, the Cal 17 API 2 contract could gain some more ground this month, said Tom Høvik, head of Montel’s technical analysis services.

“The bullish trend structure is still in place for further upside ahead,” he said, adding “by avoiding a break below USD 51.15/t, this product looks like it will be aiming for a test of the USD 60.75/t level, possibly during the July month.”


Reporting by:
Laurence Walker
11:30, Friday, 1 July 2016