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Coal swaps comment: European benchmark at 19-month low as sellers take over

25 Apr 2012 19:57:26 | csd

European coal swaps plummeted on Wednesday as a combination of weak fuels, flailing global economies and bearish fundamentals prompted a sell-off.

The European benchmark CIF ARA Year 2013 contract fell to its lowest level in more than 19 months on Wednesday, shedding $1.20/tonne day on day to close at $109.25/tonne.

The contract had traded even lower during the day at $108.80/tonne, but managed to find some support in the afternoon, traders said.

Market participants attributed the sharp decline to a combination of factors, with many saying banks were among the most aggressive sellers of the day.

"A few banks have put options on 2013," one trader said. "As prices go down, they get longer and need to sell. There are several strikes - $115/tonne, $110/tonne, $105/tonne, $100/tonne, $95/tonne and $90/tonne."

The source pointed out that the benchmark could fall further, but may need some external factors to spur the declines, such as exchange rates and crude oil.

"A lot of people seem to agree that this might only be the beginning of the decline," a second source agreed.

Others agreed that the options volume contributed to the day's bearish momentum, but one trader said the fact that the banks were selling was a consequence rather than a cause.

"The banks are selling, but I'm sure they are not the only ones. If it was just a question of options, then if the market starts rising, the banks will buy again," he said.

"So options might quicken the moves but I do not think they impose a direction," the source added.

Among other reasons for the decline, some market participants said that people might have gone long and were now stopping out, while others said bearish spot was the most likely driver.

As supply of US and Colombian coal remains high, and demand remains low, European spot prices have nowhere to go but lower, traders said.

A Bank of America Merrill Lynch Global Research report that was released on Wednesday lowered its US natural gas price forecasts for 2012 and for 2013 as a result of lower-than-expected demand. "Due to the warm weather, US natural gas prices have spiralled down in recent weeks... Prices are now so low that they are displacing PRB coal in power generation," the research note said.

Low US domestic gas prices have been the key reason behind the abundance of US coal offered into the European and Asian markets.

CIF ARA May '12 contract shed a further $0.70/tonne day on day on Wednesday, to close at $94.50/tonne, while the front quarter fell $1.05/tonne to close at $99.20/tonne.

Meanwhile, the South African curve contracts followed the bearish European sentiment, with FOR RB Cal '13 losing $1.25/tonne to close at $107.50/tonne.

This was the contract's lowest closing level. According to ICIS data, this is the contract's lowest closing level on record.

The contract also closed at this level on 16 January, ICIS data shows.

Closer in, however, levels were better supported on reports that India might still be in the market for some physical coal before the monsoon season kicks in.

FOB Newcastle June '12 physical coal traded in 75,000 tonnes at $100.25/tonne (through globalCOAL) on Wednesday, down from a bid and offer at $101.50-101.25/tonne reported on Tuesday.

As a consequence, the contracts across the FOB Newcastle curve shed an average $1.12/tonne day on day. MV

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