Nena News

MONTHLY – Asia-Pacific may spur European coal prices

(Montel) European coal prices will continue to take the cue from the Asia-Pacific market over the coming month, although strong supply and waning demand in the Atlantic Basin will likely offset further price gains, participants said on Tuesday.

The front-year API 2 contract will therefore likely remain within the relatively broad USD 60-70-range, traders and analysts said.

The front-quarter API 2 contract ended last month at USD 73.17/t, up 3% from March’s close – yet down from the month’s peak of USD 75/t – while the Cal 18 contract was a marginal 1% higher at USD 66.48/t.

On the physical market, the Global Coal Des ARA index was assessed on 28 April at USD 73.18/t, up 4% month on month.

Yet physical trading activity has been thin, with just one Des ARA cargo trading via broker Global Coal last month, compared with 10 in the same month last year.

“China remains the key thing to look at,” said Andy Sommer, senior analyst at Axpo Trading.

“We’ve seen some recovery in domestic production in March and stock levels are also on the rise, so this could be the first step in the path to stabilisation for the Chinese market,” he said.

Combined inventories at China’s four key Bohai Rim coal ports were last seen at around 12m tonnes, more than 2m tonnes higher than at the same time last year, port data showed.

However, a great deal more restocking would be required to meet looming summer and winter demand and it was unclear at this stage if current levels of production – both domestically and internationally – would be sufficient to meet this, said market participants.

“If producers are too cautious, the market could remain short,” Sommer said.

“In terms of drivers, we’re looking at the Pacific really,” said an analyst with a European coal trading firm, adding “inevitable demand” from Chinese utilities for the summer cooling season was a “major issue”.

“We know the [Asia-Pacific] production trend is growing but up to March it has been flat year on year, so let's see what the April figures show,” he said.

For the time being, sentiment appeared bearish, with the Global Coal Newcastle (Australia) index – a benchmark for Asia-Pacific coal prices – assessed on the last trading day in April at USD 79.83/t, nearly USD 10 lower than levels seen early in the month.

Downside risk
“We see downside risk developing this month” said Diana Bacila, senior analyst at Oslo-based Nena, citing an anticipated rise in Pacific Basin coal supply, sustained high exports from Atlantic-based producers and the stricter Chinese government efforts to bring domestic coal prices within “reasonable levels”.

“Acknowledging the ongoing tightness in the domestic market, the government will likely incentivise miners to increase production in the coming months, ahead of the summer cooling season,” she said.

Furthermore, Indonesian and Australian export levels were likely to increase, as recent weather-related output issues receded, she said.

European picture
In Europe, coal consumption declined in the first four months of the year, compared with January-April last year, while exports from Colombia, Russia and the US were “very strong” in the first quarter, Bacila said.

“If the strong export levels are sustained, the seasonal fall in European demand, combined with high competition from gas and some displacement from renewables, will pose downside risk to API2,” Bacila said, adding, however, that low hydropower reserves in Europe might encourage increased coal usage.

Furthermore, there was no apparent shortage of coal already on the ground in Europe, with coal stocks at four key northwest European dry bulk terminals reaching their highest levels since late November 2015, of 5.63m tonnes, Montel data showed.

From a technical standpoint, there were no clear directional signals for the Cal 18 API 2 contract this month, said Tom Høvik, head of Montel’s technical analysis services.

“It would seem like this product will remain in a sideways pattern, within the USD 60.50-68/t range this month,” he said, adding, however, there could potentially be a test of the upper USD 68/t mark.

“If broken, we could see a test of USD 70.25 at some point during May.”

Reporting by:
Laurence Walker
12:20, Tuesday, 2 May 2017