Nena News

COAL – Prices continue to drift lower as floor approaches

(Montel) European coal prices have drifted lower this week as short-term fundamentals encourage selling, despite emerging signs that the oversupply in seaborne material is being eroded, participants said on Thursday.

The Q4 API 2 contract was last pegged at around USD 57.90/t, down by around 1.2% from Friday’s close, while the Cal 16 last dealt at USD 57.60/t, down by 1%.

On the physical market, the Global Coal Des ARA index was last assessed at USD 58.40/t, up by USD 0.10 from Friday.

European coal prices have traded lower this week as traders eye abundant stocks, still high temperatures and preference for gas in the UK limiting utility demand for the fuel.

Coal stocks at four key northwest European dry bulk terminals were last seen at 6.4m tonnes, their highest levels for eight months, while temperatures across Europe were expected to stay at 3-8C above normal, until mid-next week, according to forecaster SMHI.

Short-term pressure
And over the short-term, prices were more likely to fall than rise, said players.

“Downside risks [include] the slowdown in the Chinese economy and growth in its hydropower output, a stronger dollar, high coal inventories in China and India, and high renewable power output in Europe,” said Diana Bacila, coal analyst with Oslo-based Nena.

“These could bring API 2 prices closer to Atlantic coal producers’ cash cost levels including shipping cost to Europe.”

However, over the longer-term, the recent narrow trading range may suggest the Atlantic market is nearing an equilibrium, “as the global oversupply is slowly vanishing”, she added.

“With freight rates at relatively low levels in 2015, the spreads between different FOB regional coal prices have narrowed. Reduced transportation costs have allowed coal volumes to move across basins and reduce the short-term imbalances in the Atlantic and Pacific,” said the analyst.

“Unsustainably low”
Coal prices below USD 50/t seem “unsustainably low” because they induce supply destruction in Russia and Colombia, while prices above USD 65/t would likely open “more trading opportunities” between South Africa, Australia and Indonesia to Europe, while also bringing more US coal supply back to the export market, she said.

“Thus, the current coal price level is close to the estimated floor for Atlantic coal producers, Russia and Colombia, but also allows other global producers to price into Europe, indicating that EU demand is not fully met with volumes from its base suppliers,” said Bacila,

Of Europe's base suppliers, Colombian supply remains disrupted by weather and Fenoco’s night railings ban, while US mines are closing down, limiting export potential from both countries.

Reporting by:
James Allen
17:55, Thursday, 16 July 2015