Nena News

MONTHLY – Coal market may reach floor in August

(Montel) European coal prices are likely to remain under pressure in August amid a lack of supportive supply-demand factors, although further losses could be negligible, market participants told Montel.

The Cal 16 API 2 contract may potentially break below historical lows of USD 55.25/t, achieved in April, although the market will probably still remain within the USD 55-60/t range, traders and analysts said.

The Q4 and Cal 16 API 2 contracts ended July at USD 56.13/t and USD 55.78/t, respectively, down 7% and 8% from the end of the previous month, while broker Global Coal last assessed its physical Des ARA coal index at USD 57.70/t, down by around 2%.

“The Cal 16 API 2 contract may enter the USD 55/t-zone in early August, perhaps testing the low-end of the ongoing, wider USD 55.25–60/t range, in which the market has been trading since March,” said Tom Høvik, head of Montel’s technical analysis services.

But the market was most likely to remain within the aforementioned USD 4.75/t range, he added.

“Support should be around current levels, or just a tiny bit below,” said Scandinavian coal trader, citing a potential low of USD 55.50/t for the Cal 16 contract, and adding “it’s hard to see the market dropping much”.

“If prices dropped below USD 50/t, it would induce a lot of supply destruction,” said Diana Bacila, coal analyst with Oslo-based Nena, regarding the likelihood of mine closures in a number of producing countries at such unsustainably low prices.

For this reason, “even if all the bearish drivers play out together”, the downside was still likely to be limited to USD 50/t, she said.

Oil relationship
Coal prices, especially on the paper market, have been tracking moves on the wider energy complex in recent weeks – especially oil – and this relationship is expected to persist.

“Until we see a significant and sustained drop in oil prices – for example, to the USD 45-50/bbl range [for front month Brent crude, which last traded at USD 51.82/bbl] – there will not be any significant downside to coal prices,” said Bacila.

Although the link remains fairly tenuous, coal prices can follow oil movements in times of thin liquidity or when fundamental supply-and-demand factors are scarce.

Indeed, with European inventory levels still strong, a lack of any notable disruptions to exports and seasonally low demand, it was proving difficult for traders to gauge market direction from the fundamental supply-demand picture.

Combined stocks at four key European dry bulk terminals rose to an eight-month high of around 6.5m tonnes in mid-July, and have only marginally declined since then, according to Montel data.

Asia-Pacific demand

And in the Pacific basin, where import demand fluctuations can have a strong influence on global coal price movements, Chinese and Indian import demand was anticipated to remain relatively lacklustre, with first-half imports for the former plunging by nearly 40%, year on year.

And in the latter, an abundance of rain – resulting in stronger hydropower generation levels – higher domestic coal production and abundant stock levels were likely to limit the country’s import requirements over the coming month, said Bacila.

Plant inventories at 100 plants monitored by India’s Central Electricity Authority were around three times higher than at the same time last year, in late July, at 30m tonnes. 

Reporting by:
Laurence Walker
07:44, Monday, 3 August 2015

Editing by:
James Allen
07:44, Monday, 3 August 2015