COAL OUTLOOK – API 2 to remain tied to oil

 (Montel) European coal prices are likely to remain closely tied to other energy commodities this week, with bearish oil, specifically, potentially pulling API 2 contracts to fresh lows, analysts and traders said on Monday.

The Cal 17 API 2 dropped to a new low of USD 37.25/t on Thursday, and was last seen at USD 38.75/t, according to Ice data.

“It’s like catching a falling knife right now,” Andrey Shubin, a Norway-based analyst at SKM Energy, told Montel.

“You have to first look at oil, and the wider macro situation, and then look to find some fundamental situation that could pull coal away from that. I don’t see anything like that happening right at the moment. So I don’t think coal will decouple from oil just yet.”

However, news that China plans to cut steel production capacity by up to 150m tonnes could support coal prices a touch, he added.

Oil at 12-year lows
Oil prices, which remain near 12-year lows as global supply continues to outstrip demand, fell 4% on Monday as Iraq announced record-high oil production.

The front month Brent North Sea crude contract was last seen at USD 30.78/bbl, down USD 1.40.

Coal burn in Europe is expected to ease this week amid milder weather and weak industrial power demand, said Diana Bacila, an analyst at Norway-based consultancy Nena, predicting prices to fall over the next few days.

“With oil prices holding close to USD 30/bbl and the Rouble at these levels (77 USD/RUB), Russian coal miners will be able to accept lower dollar prices in the short-term,” she said.

However, API 2 prices may receive some support if Rhine water levels risk falling further, she added.

“This will incentivise European utilities to quickly replenish coal from ports in order not to pay surcharges, freeing up some space for new deliveries into ARA.”

Ongoing salary negotiations in Colombia mean there is also a risk of a strike, potentially curbing exports and again potentially lifting the API 2, said Bacila.

“Chinese utilities are also restocking ahead of the Chinese New Year holidays and may lend some support to prices due to a cold spell expected to hit Northern China these days.”

“White noise”
Longer-term, prices should rise, added Shubin, pointing to production declines and the potential for restocking in China, and demand growth in India as the country fires up new coal-fired power plants.

“Right now it’s a trend, and there’s white noise within the trend about whether coal is going to trade at USD 43 or USD 40 or wherever, but we need to remember that that’s still below the cost cash costs of 70% of all globally trade coal, so longer term current prices don’t support future investments in production.”

On the technical side, the Cal 17 API 2 contract may push above USD 40/t this week, said Tom Høvik, head of Montel’s technical analysis services.

“Last week closed with a buy signal ahead of this week’s trading and as long as the market does not have a daily close below last week’s midpoint at USD 38.425/t during this week a potential move into the USD 40-zone may be seen this week,” said Høvik.

Prices & Spreads

*Montel assessments

Stocks
European port coal stock levels as of 16 February, obtained by Montel from the respective terminals (against previous week):
EMO (Rotterdam) – 1.8m tonnes (unchanged)
OBA (Amsterdam) – 1.68m tonnes (-0.22m tonnes)
EBS (Rotterdam) – 0.4m tonnes (unchanged)
Ovet Vlissingen/Flushing – 0.588m tonnes (+0.077m tonnes), combined thermal and coking
Ovet Terneuzen –  0.194m tonnes (+0.007), comprising petcoke, anthracite and coke

Events
Coaltrans is hosting its annual USA coal conference in Miami over 28-29 January.