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Coal swaps comment: Bears maintain hold on coal as technicals turn bearish

17 Apr 2012 19:36:16 | csd

The decline of global coal swaps prices showed no signs of stopping on Tuesday as contracts across the three main hubs continued to shed value, despite the fact that crude oil, as well as gas, power and carbon emissions, recovered.

The European benchmark CIF ARA Year 2013 opened the session at $112.10/tonne and fell to an intra-day low at $111.80/tonne before recovering to close at $112.05/tonne, down by $0.45/tonne day on day.

Although traders said on Monday that coal would continue to track crude oil over the course of the week, the recovery staged by the front-month Brent contract on Tuesday was deemed too small to outweigh coal's bearish fundamentals.

In addition, traders stressed that the benchmark contract had broken a significant support level on Monday, which had turned the technicals bearish too.

"Fundamentals are definitely not adding much support, but mainly, it now does look like we finally took out the support levels, first at $113.25/tonne and then at $112.80/tonne. Technically, the picture looks very bearish," a source said.

While traders allowed for the possibility of a small upwards correction over the next few days, some market participants agreed that the coal market seems to have finally assumed a clear direction after weeks of range-bound trading.

One participant said the technical support levels have definitely been broken, but added that coal remains fairly far away from the recent low of $111.00/tonne: "We might just get there, but the question is, would I want to sell there. The answer is probably not," the trader added.

A second trader, however, said there is no real reason why the coal market shed so much value over the past two days. "I can't work out how the coal market is fundamentally any different now than in the last three months," he said. "We have seen a huge buying interest in the contango this week with people buying the quarters and selling Cal '13. This seems to have contributed to the sell-off, with people pushing the front down - stopping out, I guess - which has meant the Cal '13 went down as a result."

The trader added such trading will make it difficult for coal to price into Europe as price levels fall below production and shipping costs.

In addition to aggressive selling, oversupply continues to dominate the European spot market at the moment, with CIF ARA May '12 contract marking a record low on Tuesday by shedding a further $1.00/tonne day on day to close at $97.30/tonne.

The front quarter also fell day on day, despite the fact that UK and German clean dark and clean spark spreads continue to favour coal generation.

UK National Grid said in its summer outlook on Tuesday that current fuel prices strongly favour coal burn over gas for the summer and next winter.

"As a result, coal-fired generation is expected to run at higher load factors than gas this summer," the outlook said.

Meanwhile, in the Australian market the first index-qualifying FOB Newcastle physical deal this month was reported. FOB Newcastle June '12 physical traded in 75,000 tonnes at $102.25/tonne (through globalCOAL), $5.75/tonne below the last recorded June deal at $108.00/tonne on 28 March, according to ICIS data.

The contract was bid at $99.75/tonne and offered at $102.25/tonne in the previous session, according to globalCOAL.

The corresponding financial contract did not trade and was assessed at $103.50/tonne, down $1.25/tonne day on day.

South African financial coal contracts also slipped lower on Tuesday, responding to the moves on the European curve although liquidity was once again limited. MV

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