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Physical coal: European coal demand rises as prices spiral lower

04 May 2012 13:55:54 | csd

Physical coal prices fell to new lows in week 18 as US coal cargoes continued to flow into Europe and Asia.

Although activity in the Asian markets was subdued because of the Chinese Golden Week holiday as well as Labour Day holidays in India, Singapore and South Africa, low prices sparked interest with European traders, and several DES ARA trades reported over the course of the week.

Prices of coal delivered into Europe fell below $90.00/tonne early in the week, with a distressed May '12 DES ARA cargo changing hands at $86.25/tonne on Tuesday. After that, physical prices of coal with delivery in June and July spiralled lower, with a DES ARA June '12 trade changing hands at $86.50/tonne on Thursday, $6.65/tonne below an equivalent deal recorded a week ago.

ICIS data show that a total of 650,000 tonnes of coal was bought in week 18, up significantly from just 275,000 tonnes worth of trade reported a week earlier.

Market participants said the attractive prices were the main reason behind the increased demand.

"Aggressive selling in recent sessions has pushed the index discounts to good levels for end-users to pick up," one physical trader said.

Because of the wide contango, sources also said utilities were keen to stock up while levels are low. In addition, coal burn in Europe is said to be high because of healthy profit margins for coal-fired power generation.

ICIS data show that the German June '12 clean dark spread rose to its highest recorded level on Wednesday, at €7.38/MWh. In comparison, the corresponding clean spark spread was calculated at minus €11.78/MWh.

The UK June '12 clean dark spread was also high, at £16.48/MWh. UK transmission system operator National Grid's data (collected by ICIS at 16:00 London time each working day) show coal-fired power plants produced more than 41% of the country's total power generation this week.

But despite this, one physical trader with a European utility said the amount of coal utilities burn "depends mainly on the weather". Sources had previously expected European coal demand to fall ahead of summer because solar-power generation - particularly in Germany - is expected to increase as the days become longer.

European physical coal prices managed to find some support towards Thursday's close and on Friday, but sources attributed the slight uptick to the fact that the market has fallen so swiftly in the first half of the week.

"There is still a lot of US coal around. And for the moment, it does not look like supply is reducing in any way," one trader said. "The market remains weak, and considering how much prices fell recently, we're just seeing a slight bounce."

Indian Ocean and the Pacific

Despite falling to an 18-month low of $97.00/tonne on Wednesday, South African spot prices remained firmer in week 18, with underlying Indian demand underpinning values.

According to European market participants, low prices in the Australian market have begun attracting Chinese interest, despite the prices of high-grade FOB Newcastle physical coal remaining around $30.00/tonne above what Chinese traders are reportedly willing to pay for Indonesian coal (see CSD 3 May 2012)

However, sources from China said traders in the country have so far bought around 10 capesize shipments of high-sulphur US coal, and were now looking to buy lower-grade coal from Indonesia to blend with the US product.

Looking ahead, sources still expect Chinese coal demand to increase later in the month as summer begins.

However, the potential increase in power demand caused by the hot weather could be restricted by the slowdown in Chinese economic growth and ample hydropower generation. MV

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