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Coal swaps comment: Coal swaps fall to ‘reasonable levels’ on low Friday liquidity

27 Apr 2012 18:49:11 | csd

After a temporary uptick in coal swaps prices on Thursday, values fell back to recent lows on Friday as liquidity dried up ahead of the weekend.

European benchmark CIF ARA Year 2013 contract, which gained $1/tonne in the previous session, defied the firmer gas market and retraced all of the previous session's gains to close at a new 2012 low of $109.10/tonne on Friday, down $1.15/tonne day on day.

The contract opened the session at $109.75/tonne and was swiftly sold down in just 15 transactions. One market participant said that the day's decline brought the contract back to "reasonable levels".

The falling front-month Brent crude added some downwards pressure towards the end of the day, but traders said that the coal market finished at more or less the same level as two days ago. "We seem to have found a new range of $109.00-110.50/tonne," one source said.

Although sources had predicted earlier in the week that the contract had room too fall, traders now said support is building around the $109/tonne level.

One trader even predicted that the European curve would recover in the coming week but gave no specific reason why.

Some physical market participants were of a similar opinion, saying that levels of US coal sold into Europe are now declining, which could help underpin prices over the coming weeks and months (see physical comment).

Closer in on the European curve, the CIF ARA front-month declined $0.90/tonne day on day to close at $93.95/tonne.

In contrast, the physical level firmed on Friday, with DES ARA June '12 cargoes offered at $94.25/tonne, up from offers at $93.25/tonne in the previous session.

However, traders agreed that liquidity was extremely low on Friday - a trend observed over the past couple of Fridays.

"Liquidity is really unusually thin. A lot of European companies have either moved to Asia or closed their desks, so some of the key players are still on gardening leave or haven't found new employment yet," one trader said. "This has taken a lot of liquidity out of the market. Q1 or Q2 would normally be quite active months."

With little physical trade to influence the direction of the South African and Australian coal markets, the two FOBs followed the European market lower on Friday.

Once again market participants said that the majority of the trade is based around lower-quality coal, with physical coal market indices pushed to the margins as Asian buyers source coal based on price rather than quality (see separate story).

Over the coming weeks, market participants expect Indian demand to fall further as the monsoon season starts.

Despite this, the front-month FOB RB contract lost just $0.50/tonne day on day to close at $98.60/tonne, with traders describing the market as "unusually firm".

Similar declines were recorded on the South African far curve, with Cal '13 shedding $0.75/tonne to close at $107.40/tonne. The Australian front-year contract declined by $0.50/tonne to close at $111.00/tonne. The move widened the spread between the two FOB front-year contracts to $3.60/tonne, from $3.35/tonne in the previous session. MV

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