COAL OUTLOOK – Cal 18 faces near-term support

(Montel) European coal prices are likely to gain further ground in the near-term, amid strong Asia-Pacific demand and supportive technical signals, yet the prospect of increased Chinese production could limit gains, participants said on Monday.

The front year API 2 contract rose 1.5% over the past week to a latest trade at USD 90.25/t, on Ice Futures.

And on the physical market, the Global Coal Des ARA index gained 7% week on week to USD 97.68/t. This was only marginally below the previous session’s one-year high of USD 97.75/t.

“The support to API 2 is provided by strong heating demand in Asia and tight coal supply in the Pacific, which requires Atlantic volumes to head to the far east,” said Diana Bacila, senior analyst at Oslo-based Nena.

This comes at a time of tight LNG supply in Asia, due to strong heating demand in Japan, South Korea and particularly China, after the anti-pollution policies spurred demand, she said.

“Gas shortages and below-normal temperatures urged the Chinese government to allow coal plants to run, despite previously released coal-to-gas switch regulations in heating, [and] this should increase import demand in China and provide support to coal prices in the Pacific,” she said.

Indeed, the Global Coal Newcastle index – a Pacific Basin benchmark for coal prices – was assessed last at USD 102.59/t – the highest since November 2016.

Limited gains
Yet further gains may be limited, Bank of America Merrill Lynch analysts said in a note, predicting an average Newcastle price of USD 88/t for the first quarter of 2018, down 7% from the estimated Q4 2017 level.

With prices nearing the upper end of the “tacitly agreed policy range” of CNY 550-750/t (USD 75-105/t) – i.e. too low for coal miners or too high for coal-fired power producers – Chinese policy makers will likely take steps to counteract the gains, they said.

“We expect Chinese miners to be allowed again to ramp up production with the support of domestic policy makers [and] this change spells downside for prices,” they said.

Furthermore, in the Atlantic basin, the coal-burn in Europe will decline over the Christmas and New Year holiday period, due to reduced industrial activity and forecasts of milder weather, said Nena’s Bacila.

But in the short-term, from a technical viewpoint, the Cal 18 API 2 contract was likely to gain some ground, said Tom Høvik, head of Montel’s technical analysis services.

“Friday’s close argues for seeing the USD 91-92/t area being met this week,” he said.

Prices & Spreads

Stocks
European port coal stock levels as of 18 December, obtained from the respective terminals (against previous week):
EMO (Rotterdam) – 2.3m tonnes (-0.2m tonnes)
OBA (Amsterdam) – 1.7m tonnes (-0.15m tonnes)
EBS (Rotterdam) – 0.13m tonnes (unchanged)
Ovet Vlissingen/Flushing – To be added later
Ovet Terneuzen – To be added later

Reporting by:
Laurence Walker
laurence@montel.no
11:19, Monday, 18 December 2017