Nena News

MONTHLY – High stocks to limit coal demand

(Montel) European coal prices are likely to fall as much as USD 4-5 to new record lows in October, as high stocks, abundant supply and weak demand continue to weigh on sentiment, market participants said.

API 2 and Des ARA index prices could drop to as low as USD 45/t in October, a survey of analysts and traders showed.

“European coal prices may decline this month, however the downside is limited to USD 45/t for the rest of 2015, considering current cash costs for major miners in the Atlantic basin,” said Diana Bacila, an analyst at Oslo-based Nena.

“A USD 45/t price scenario implies Europe sees a warm winter, lower gas prices and higher renewable power output reducing the need for coal imports,” she said, adding that some restocking could begin ahead of winter but it would unlikely offer much price support given the supply glut and weak demand outlook.

As with previous months, September was plagued by a wealth of supply coupled with lacklustre demand in both the Atlantic and Pacific basins, and the situation shows little sign of abating in October.

The Q4 and Cal 16 API 2 contracts ended September at USD 50.58/t and USD 48.49/t, respectively, down 7% and 9% from the end of the previous month.

The API 2 front-year contract hit a record intraday low of USD 48.40/t on the last day of September.

Global Coal Des ARA index was last assessed at its lowest levels since Montel began collating the data in February 2013, at USD 51.74/t.

High stocks

Combined coal stocks at four key north-west European dry bulk terminals in September were already at more than two-month highs, of 6.2m tonnes, as low river levels hindered onward barge shipments to Germany.

“Stocks in Europe look pretty healthy, so I don’t see much more demand in October,” said a coal analyst with a large European utility, adding that if oil prices remain low, and the Russian ruble stays weak, there was “no reason why prices shouldn’t drop to USD 45/t”.

At the time of writing, the Russian ruble was at around 65 against the US dollar, 64% weaker compared with the same time last year, making dollar-linked coal exports more lucrative for the producers while reducing production costs.

Technical bearishness
From a technical view, the Cal 16 API 2 contract was likely to keep softening this month, said Tom Høvik, head of Montel’s technical analysis services.

“The market seems to be in for some further downside in October, heading for the low USD 47/t area,” he said, noting a drop to around USD 46/t was also a possibility.

“[However] a bullish warning will occur if the market closes above USD 51.10/t,” he said, adding this could pave the way for a rise to around USD 53/t again – a level not achieved since the start of September.

“Potential upside drivers for API 2 may arise if Europe sees a cold winter with less renewable power output, offering support to coal consumption,” Bacila said, regarding the fourth-quarter outlook.

Gas-to-coal switching in the UK could also provide price support in the winter months. 

Reporting by:
Laurence Walker
09:30, Thursday, 1 October 2015

Editing by:
Jeff Coelho
09:30, Thursday, 1 October 2015