COAL OUTLOOK – API 2 to rise on low river levels, China

(Montel) European coal prices started the week in bullish mood on Monday, with further gains anticipated over the coming days, amid low river levels in Germany and rising demand in China.

The Cal 17 API 2 contract gained USD 1.57 on Ice at USD 67.35/t, after earlier trading at USD 67.50/t, just off a 21-month high of USD 67.55/t reached on 6 October.

On the physical market, the Global Coal Des ARA (delivered ex-ship, Amsterdam, Rotterdam and Antwerp) index was last assessed on Monday at USD 79.50/t, up 3% week on week.

A December-loading Des ARA cargo traded in the current session at USD 80/t, up USD 4.75 from a similar trade on Friday.

Low water levels on the Rhine have started to impact coal deliveries to some power plants in Germany, lifting European coal contracts, said a coal broker.

Current stock levels at power plants were low, meaning that restocking ahead of winter remained a positive driver, said Nena analyst Diana Bacila, noting European inventories totalled 30m tonnes by end-May, down 30% year on year, with UK stocks particularly low.

“But if the coal plants in reserve are required to produce electricity this winter, they’ll have to start restocking,” she said. “I assume they are already doing it, which offers support to API 2.”

China demand
The Atlantic Basin market remained supported by rising demand in Asia, added a London-based commodities analyst.

“The Chinese stats released today showed a big rise in coal imports for September,” said the analyst.

China imported 813,000t/day (24.4m tonnes) of coal and lignite in September, a rise of 37.3% from the same month last year, as lower domestic output drove purchases of foreign coal, customs figures showed on Monday. 

From January through September deliveries reached 180.3m tonnes, up 15.3% from the same period in 2015.

The Chinese government in April reduced the number of days that mines can operate per year by 16% to 276, which resulted in a huge step-up in import demand, in turn driving up seaborne prices.

But late last month it lifted production restrictions on as many as 800 domestic coal mines, in order to curb surging prices.

“Although the government has relaxed the limits on production it seems that it will take quite a while for the production to ramp up,” added the analyst.

US export arb
In fact, Chinese coal prices had started the week on a bullish note, added Bacila, adding this could be because of maintenance on the Daqin railway, which carries about a third of China’s rail deliveries of coal.

The front-month API 8 contract, which reflects 5,500 kcal/kg coal delivered to south China, was last seen at USD 80.50/t on Nymex, up USD 2 on the week.

“Hydropower generation remains a supportive driver to coal, but as South China is entering shoulder demand season, it may help to tame off strong growth in thermal power demand.”

However, rising prices in Europe could reopen the arbitrage to export coal from the US, capping upside going forward, she said.

“US coal arbitrage to Europe is USD 2 away from competing in Europe, so if API 2 gains to open up the arb, further upside may be limited.”

Liquidity in the market is expected to be thin at the start of this week, with many participants away at the Coaltrans Conference in Lisbon liquidity, added the coal broker.

Prices & Spreads

*Montel assessments