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Weak physical values depress coal curves across the board

30 Apr 2012 18:48:08 | csd

Coal near- and far-curve values edged lower on Monday as the impact of the weak fundamentals on the prompt trickled down to the further-dated contracts.

Both Brent crude and natural gas values firmed during the trading session, but the coal benchmark CIF ARA contract fell lower from $109.10/tonne on Friday to $107.90/tonne on Monday. "I would really have expected that the coal far-curve values will at one point start to take a lead from stronger gas and oil, but that has not happened. Coal is following its own fundamentals now," one source commented.

The contract fell as low as $107.35/tonne during the session, its lowest levels since 19 May 2010, before bouncing back in the afternoon. The front year found some strength last week, but the gains were short-lived, as the contract closed lower for the third consecutive session.

The sharp falls left some wondering how far the contango between Year '13 and '14 could go. The CIF ARA Year 2013 contract closed with a $6.30/tonne discount to the Year 2014, but contango between Year '14 and '15 is currently much narrower at $5.25/tonne. Year '12 also closed with much tighter discount to Year '13 on 31 December at $5.35/tonne.

Weak physical values and poor European demand were quoted as the underlying reasons for the losses on the curve and prompt. Some even believed that the prompt prices for swaps contracts could fall by a further $5/tonne and go as low as $85/tonne on the physical market.

A 50,000 tonne physical cargo for June '12 was sold on the CIF ARA physical market at $90.50/tonne, with a $2.50/tonne discount to the equivalent paper contract.

"The American producers must be close to their break-even levels at these prices," one source said, suggesting that American producers might start backing out of Europe soon due to the low prices. Many believe this to be the only bullish factor for the near-curve prices.

It has been reported that healthy clean dark spreads have incentivised more coal burn by German utilities. Indeed, according to data from the EEX, coal-fired generation for the period of 1-29 April has increased by 700GWh compared with the same period in March. Yet, high coal burn seems to have little impact on the European prices. "Even with this pretty decent coal burn, we are still not seeing any support for the CIF ARA near curve," one source commented.

Trading activity in the FOB Newcastle hub was focused on the near curve, as two front months as well as the front-quarter changed hands in relatively decent volumes.

All the traded products lost value intra-day, however, similarly to their CIF ARA counterparts, with the Q3 '12 contract making the biggest session on session losses. The FOB Newcastle Q3 '12 contract closed at $102.40/tonne on Monday, down $2/tonne session on session.

Prices in the South African hub also fell session on session, dragged lower by the bearish sentiment from the European curve. All contracts from May '12 to Q2 '13 fell in the range of $1.35/tonne to $1.55/tonne. The intra-day losses on the front-year contract of FOB RB were not as heavy as on the CIF ARA equivalent, however. The product started trading at $106.60/tonne and traded as low as $105.80/tonne before bouncing back to close at $106.25/tonne. SR

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