Coal swasp comment: Bears tighten their grip on oversupplied European coal market
Weak physical coal prices sent the European curve lower on Wednesday, with spot swaps prices taking the brunt of the falls once again as physical levels remained firmly below the $90/tonne mark.
The far curve also posted losses, although sources said the values were better supported, widening the contango.
Physical coal prices fell further, with DES ARA July '12 trade changing hands three times at $88.00/tonne, down by $3.00/tonne from the reported mid-market price at $91.00/tonne on Tuesday.
Later on in the day, a 50,000 tonne June '12 cargo also changed hands at $88.00/tonne (through globalCOAL), down from a trade at $90.50/tonne on Monday.
According to market participants, the European market remains oversupplied with US and Colombian coal, while utilities still have more stock than they are able to burn. "A lot of US and Colombian coal is still being offered," one physical trader said. "At the same time, utilities are long, so they are selling."
But, with physical prices now falling to their lowest levels since ICIS began collecting the data, the market is speculating about further downside potential. "I doubt prices would go much further," one source said. "I think $85.00/tonne would be the low."
Another financial coal trader said he was "cautious over how sustainable such low levels can be", indicating that producers could start withdrawing their cargoes if prices fall too far.
Although coal burn in Europe remains high because of the attractive clean dark spreads, the persistent oversupply in the physical market wiped $5.50/tonne from the CIF ARA June '12 contract this week alone.
However, while spot levels are falling sharply, market participants on Wednesday pointed out that the time spreads on the far curve are widening. "The back end is holding up reasonably well, with time spreads widening," one trader said. "For example, the spread between Q3 and Q4 '12 has widened from around $4.20/tonne to $4.95/tonne in just a few days."
Meanwhile, the European benchmark CIF ARA Calendar Year 2013 contract tested the intra-day lows at $106.25/tonne on Wednesday before retracing some of its losses to close at $106.60/tonne, a fall in value of $0.85/tonne day on day.
The South African market was also bearish, with Chinese and Indian traders still showing little interest.
A capesize FOB RB June '12 physical cargo traded at $97.00/tonne in the morning (through globalCOAL), down from an offer at $101.50/tonne in the previous session. The trade was the first FOB RB June '12 transaction reported to ICIS and the lowest spot FOB RB physical deal in more than 18 months, ICIS data showed.
Although South African physical prices remain several $/tonne higher than their DES ARA equivalents, one physical trader said the "implied freight is roughly around the level where it should be".
Low liquidity stemmed the losses on the spot and near-curve financial contracts in South Africa, with contracts posting only small session-on-session losses, traders said. However, the far curve inched higher, with one trader attributing the support to underlying Indian demand.
That narrowed the implied freight on the front-year financial products to $0.75/tonne from a $1.65/tonne spread on Tuesday. MV
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