(Montel) Cooling temperatures in China and a receding risk of La Nina weather pattern this winter have sent front-year paper coal prices to around two-month lows this week, participants said on Thursday.
The front-year API 2 contract fell 1.8% week on week on Ice to a latest trade at USD 56.45/t. On Monday the contract dropped to USD 55/t, the lowest level since 30 June.
On the physical market, the Global Coal Des ARA index – an Atlantic benchmark – fell from USD 61.72/t last Thursday to a latest assessment of to USD 58.24/t.
The recent market tightness in China, which has seen Newcastle prices shoot to 18-month highs, had started to loosen over the last week amid forecasts the recent heat wave that has swept across much of the country would soon end, likely lowering coal demand, said an analyst with a European utility.
“The market looked tight in China until a week ago,” said the analyst.
“Now it’s forecast that the heatwave is slowly coming to an end with temperatures returning to normal this weekend. That will lower coal burn demand and mean there’s less market tightness.”
La Nina
The risk of a severe La Nina weather pattern developing this winter was also receding, lessening the chances of supply disruptions in producing countries such as Indonesia and Australia, the analyst added.
“Traders have started to price out a bit of risk premium,” said the analyst.
There is a 55% to 60% chance of a La Nina weather pattern developing this winter, down from June’s prediction of a 75% chance, according to the latest forecast from the US government's Climate Prediction Center.
A La Nina weather event occurs when waters in the central and eastern Pacific Ocean are cooler than usual. The last La Nina, which occurred in 2010-2011, was unusually severe, and caused widespread coal production and export disruptions in Australia, due to heavy flooding.
However, Nena analyst Diana Bacila said current drivers were more “mixed”.
“India’s monsoon rainfall is not strong, thus utilities are using more coal in power generation,” said Bacila.
“Rainy weather is seen returning to Indonesia, which risks sustaining the disruptions to coal production in the Pacific.”
But cheaper gas prices in Europe, which have seen prompt contracts fall below coal-to-gas-switching levels in Germany, meant coal perhaps had a little further room to fall, said the analyst.
“The market might drop a little bit more but the downside is limited. Oil is stable, and the winter La Nina risk should still support prices.”
Reporting by:
James Allen
james@montel.no
19:02, Thursday, 25 August 2016