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Coal swaps comment: Coal swaps fall to new lows on weak fuels, low demand

24 Apr 2012 18:49:56 | csd

European coal swaps fell to new 2012 lows on Tuesday as growing fears over the European economy continued to put pressure on the fuels complex. Lack of buying further suppressed coal fundamentals, as supply still looks plentiful, while global demand remains low.

The benchmark CIF ARA Year 2013 contract opened the session at $111/tonne but immediately crashed through the previous support level at $110.80/tonne, dropping $0.55/tonne day on day to close at its new 2012 low of $110.45/tonne.

As European economic worries grew stronger, the financial coal market followed the weaker gas, power and crude oil markets, traders said.

Continuously bearish fundamentals within the coal market failed to provide much support, with one source reporting that banks are selling aggressively, with "decent volume going through".

One physical trader reported that with India out of the physical market for the monsoon season and Chinese buyers not as active as they were at the beginning of the year, the lack of buying continues to pressure prices lower on both physical and financial coal markets.

In addition, as India cuts its import volumes over the coming wet season, supply will increase, delivering an additional bearish blow to the prices.

Although one trader said a decline in Indian imports has most likely been factored in, the fact that the Chinese are not buying and that US and Colombian coal is still being offered into Asia has pushed the South African physical market below the $100/tonne mark for the first time in five months, ICIS data shows.

A South African May-loading Capesize (150,000 tonnes) traded at $99.70/tonne (though globalCOAL) on Tuesday, up slightly from the bid at $99.60/tonne recorded in the previous session but $2.60/tonne below the last FOB RB May '12 physical trade recorded at $102.30/tonne on 13 April.

Consequently, both the CIF ARA and FOB RB May '12 contracts fell to their lowest recorded levels yet with CIF ARA front-month shedding $1.15/tonne session on session to close at $95.20/tonne, while the corresponding FOB RB contract shed $0.05/tonne to close at $99.50/tonne. Looking further ahead, sources debated how a potential Chinese demand comeback would affect coal prices.

"As prices stand at the moment, if China does start to restock, then their demand would be covered by imported, rather than domestic coal," one source said.

"However, the question is whether the demand is coming and whether it could tick the needle and increase prices."

The source went on to say he still expected demand to improve in the second half of the year and, seeing as China holds the largest percentage of seaborne market demand, prices would probably respond, even if supply remains uninterrupted.

"If Chinese traders start large scale restocking that could have a hefty impact on prices," a second trader said, but added it is unlikely that will happen.

"The fact that Chinese traders ended up with lots of stock at the end of last year is making them more cautious this year."

According to a Chinese source, the price gap between miners and Chinese traders is too large to negotiate.

For example, Indonesian miners are offering coal with calorific value of 3,700-3,800kCal/kg NAR at $54-56/tonne FOB but Chinese traders are only willing to pay $47-48/tonne FOB.

Once again, FOB Newcastle paper values were firmer compared with their European and South African counterparts, with traders again citing poor liquidity as the reason behind the moves. MV

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