Nena News

MONTHLY – Weakening demand may pressure coal

Montel) European coal prices may weaken further in February amid waning Atlantic demand and stiff competition from renewables and gas, but the wildcards of a possible coal-sector strike in Colombia and a supportive Asia-Pacific market remain, participants said on Thursday.

“In Europe, we’re looking to the power markets [for direction]. January was another huge month for wind generation in Germany, so that is something to keep an eye on,” said an analyst with a European coal trading firm.

“There has been a disappointing coal-burn in Europe so far this year, which increases the downside pressure on prices,” said a coal analyst with a large German utility.

“We’ve had a pretty windy start to the year, and I wouldn’t be surprised if some utilities are struggling with high coal stocks, so more contracted coal deliveries will need to be postponed”.

Furthermore, weak gas prices have increased the threat of oversupply across Europe, as power demand eases after the winter demand season, he said.

The API 2 Cal 19 contract closed on the last trading day in January at USD 82.42/t, down 3.4% from a month ago, on Ice Futures. The past week of trading has been volatile, with the contract reaching a high of USD 88.25/t on Monday before plunging to USD 82.25/t on Wednesday – its lowest level since mid-December.

“The coal burn in Europe declined by almost 50% year on year in January, due to milder temperatures and strong wind power generation,” said Diana Bacila, senior analyst at Oslo-based Nena.

“Combined with lower gas prices, these have offset API 2’s upside risk driven by a sustained tight coal balance in the Pacific”.

Strike concerns
Yet market participants said there remained some near-term supply concerns, with Colombian coal workers still likely to embark on strike action this month.

Workers from Cerrejon – Colombia's biggest thermal coal exporter – on Monday backed industrial action, with 98.9% of workers in the main union Sintracarbon supporting strikes.

However, with the deadline for declaring a strike not until next Thursday, there is still hope any action will be averted through ongoing negotiations with management.

“I guess the market has not priced in a potential strike in Colombia yet,” said the utility analyst, adding “if it materialises, I wouldn’t be surprised if the [Des ARA] index approaches USD 100/t, or even exceeds that level”. 

“But that probably depends on how long the potential strike lasts. Without a strike, I could imagine the index will continue its way down to the USD 90/t level, or even into the high USD 80s.”

“In case the strike will be announced, Colombia will lose 0.09m tonnes/day of coal output, which has to be replaced with volumes from Russia and US, posing some upside risk to API 2,” said Nena’s Bacila.

Asian influence
Aside from European factors, the API 2 market is still likely to take direction from the Pacific basin, participants said.

Cold weather and supply issues in China – coupled with strong demand from other countries in the region and Indonesian weather-related export disruptions – have proved supportive for the global seaborne market over the past month.

“We have the Lunar New Year approaching [in mid-February], but given the weather and logistics situation in China I think current sentiment will continue during February,” said a coal analyst with a Swiss trading house. “Prices will perhaps not [rise], but keep range-bound as demand recedes, along with production.”

“As in January, we’ll be watching Asia,” said the first analyst. “Chinese New Year is coming up [in mid-February] and it will be interesting to see if there’s a rush of demand before the break. If there’s no rush, it might be taken as a signal that demand is easing ever so slightly”.

The Global Coal Newcastle (Australia) index – a benchmark for Pacific Basin coal prices – ended January at USD 108.23/t, up 4.2% on the month.

From a technical viewpoint, the Cal 19 API 2 contract faces some slight bearish momentum, said Tom Høvik, head of Montel’s technical analysis services. “The risk is that we can see a move down towards around USD 80/t, before the market resumes its larger uptrend.” 

Reporting by:
Laurence Walker
07:22, Thursday, 1 February 2018

Editing by:
Jeff Coelho
07:22, Thursday, 1 February 2018