Nena News

MONTHLY – Coal to gain on persisting demand, tight supply

(Montel) Developments in the Asia-Pacific region will continue to provide direction for the Atlantic coal market this month, with expectations of persisting demand and some supply tightness likely to underpin prices, participants said on Friday.

The front-year API 2 contract traded last at USD 87.75/t, up by more than 3% on the month, while closer in on the curve, the July contract hit a contract high of USD 96.05/t.

On the physical market, the Global Coal Des ARA [Amsterdam, Rotterdam or Antwerp] index was last assessed at USD 95.03/t, up by 10% month on month.

“European pricing is dominated by expectations in Asia,” said a coal analyst with a Europe-based trading firm, noting Chinese temperature and hydropower availability developments, coupled with the ability of domestic miners to raise output, would be key indicators.

“The Asia market will continue to drive Atlantic prices,” said Diana Bacila, senior analyst at Oslo-based Nena, adding – aside from the dominant influence of China – there was also healthy demand from South Korea, India and Japan.

Big driver
“The big driver this month is China,” said an analyst with a coal exporting firm, noting “even with the [government] pushing for lower prices, prices are creeping up”.

“This [rise] does not appear to be artificial but rather due to high demand,” he said, adding there were relatively low stocks at the power plants, coupled with stronger demand in light of high temperatures and low hydropower generation levels.

China’s National Development and Reform Commission (NDRC) last week ordered utilities to stop purchasing coal and reduce stock levels, to bring domestic prices back down below CNY 570/t – around USD 90/t – by 10 June.

The news initially triggered some bearish moves on the global seaborne market but prices rebounded following a further NDRC meeting later in the week, where discussions focused on how to keep prices within the so-called “green zone”, of CNY 500-570/t. 

“It is important to keep in mind that NDRC’s objective is to contain prices within a bounded range, and there is still an effective price floor,” said analysis firm PRC Macro in a note.

At the same time, there was likely to be some continued tightness in prompt physical supply this month, in both the Atlantic and Pacific basins, said market participants.

“Soap opera”
“Australian supply could be constrained by maintenance in June and let’s see how the Eskom soap opera develops in South Africa,” said the first analyst.

State-owned South African utility Eskom has suffered severe supply shortages at a number of its plants over the past month, exacerbated by production disruptions at mines.

“No Richards Bay [South Africa] coal came to ARA last month and I don’t see much change in June,” said an energy strategist with a Geneva-based trading firm.

Meanwhile, API 2 prices would take some direction from the wider energy complex, with gas, oil and power prices still relatively well supported in the region, said market participants. 

“There are still high power prices in Germany, Spain and Italy, high [carbon] prices, lower freight rates and moderately high temperatures in Europe,” said the analyst with a coal exporting firm.

Wayne Bryan, senior analyst at Alfa Energy, also said increased coal use by power generators, due to high competing gas prices, could prove bullish for the market.

From a technical viewpoint, the front-year API 2 contract faced further gains in the longer term, said Tom Hovik, head of technical analysis at Montel.

“A lot of trading has been seen around the USD 88.25/t resistance level but the present technical set-up is on the bullish side and this argues for seeing the market back up in the USD 90/t-zone again in June,” he said.

The contract could even reach the April 2014 high of USD 96.15/t in June, or potentially July, he said.


Reporting by:
Laurence Walker
11:22, Friday, 1 June 2018