Nena News

MONTHLY – Front-year coal may bounce back above USD 60

(Montel) The oversupplied European coal market is likely to remain weak this month, amid waning demand, although prices could approach a floor, with the Cal 16 contract possibly bouncing back into the USD 60s, an analyst said.

The Cal 16 contract ended May at USD 57.75, down 1.2% from the end of the previous month, while broker Global Coal last assessed its physical Des ARA coal index at USD 57.62/t, down around 5.7%.

“We still have a downtrend for the Cal 16 API 2 but over the last six weeks or so, some bullish momentum has emerged,” said Tom Høvik, head of Montel’s technical analysis services.

“This indicates the market has found strong support that may end up taking this product into the USD 60s again this month, rather than breaking below USD 55.25/t,” he said.

“The Cal 16 could drop to the low USD 50s in the near term for sure but I don’t see much further downside as most bearish factors have already been priced in,” said Andy Sommer, senior energy analyst with Switzerland-based Axpo Trading.

“Very bearish”
“But if the Russians can return [to full export capacity] after the landslides and rumours that the Colombian rail ban will be lifted in June or July are correct, then the outlook for the Atlantic is very bearish,” he said.

A landslide in Russia’s key coal-producing Kuznetsk Basin in April disrupted railings to Baltic ports, while there have also been government enforced stoppages to night-time coal railings in Colombia since mid-February.

“From a European demand perspective, we’re in the worst part of the season as demand is declining due to growing renewables usage, especially of hydropower,” Sommer said, adding “pretty much all the main drivers in Europe are on the bearish side”.

“I see further downside but not much,” said Diana Bacila, coal analyst with Oslo-based Nena, adding Q3 API 2 prices were likely to average USD 54/t.

Average prices for the year as a whole were expected to remain below USD 60/t, she said, citing in particular the effect of weak oil prices and sluggish coal demand growth in China.

Brent crude was up 37% since mid-January but fell about 4.5% in May, while WTI prices were up 30% from a low hit in mid-March, though they fell 2.7% last month.

UK demand
In the UK, coal-fired generation was expected to remain at relatively low levels this month, after its share of the country’s power mix had declined steadily over the past two months.

At the time of writing, coal accounted for just 18% of the country’s power output, down from an average of 31% in April and a peak of nearly 50% in mid-March, in part due to the doubling of the UK’s carbon price support level on 1 April, to GBP 18.08/t.

According to Nena estimates, the UK consumed 17m tonnes of coal in January-May, 22% lower than in the same period last year.

“Gas should be more competitive than coal until September at least,” said Bacila, adding on a Europe-wide scale, however, increases in Spanish and German consumption had somewhat offset the impact of a declining UK coal burn.

But aside from the supply and demand fundamentals, June coal price movements are also likely to be dictated by the euro-dollar exchange rate.

With a weaker euro deterring European buyers from taking dollar-linked coal, the 4.2% weakening of the euro in the second half of last month to 1.09 was considered a principle factor in the coal price decline by traders.

But since 27 May, the euro has recovered some ground – with the value last seen at 1.10 – thereby potentially offering some support to the coal market.

Reporting by:
Laurence Walker
07:57, Monday, 1 June 2015