Physical coal indices - the story behind the numbers
Activity in the international physical coal markets dropped significantly in December as market participants reported most traders have already closed their positions. A lack of change to coal market fundamentals should keep coal on a bearish path, but some end-of-year positioning kept both physical and financial coal markets well supported.
Indian and Chinese buyers were largely absent from the international coal market throughout the month. While sources agreed that stocks with Indian utilities are extremely low - with 26 power plants holding only four days worth of stock - Indian buyers showed preference for lower quality coal from Indonesia.
Despite this the South African hub recorded most activity with 13 spot fixed-price deals totalling 800,000 tonnes reported. According to market participants, most of the cargoes were shipped into Europe, where coal burn is expected to remain high throughout the winter on account of profitable clean dark spreads.
As a consequence, the South African market was well supported over the month, despite the fact that the implied freight - the spread between the DES ARA and FOB RB markets - narrowed significantly, which should, in theory, close the arbitrage opportunity between South Africa and Europe.
The ICIS FOB RB December '12 physical coal index outturned at $89.565/tonne, which was up from the November index at $86.494/tonne.
But despite this large supply of South African coal headed towards Europe, the ICIS DES ARA December '12 physical coal index also firmed and was calculated at $90.668/tonne, compared with the November '12 index at $89.311/tonne.
According to market participants, the traded levels strengthened because of a number of factors, which may affect supply to the Atlantic market.
Firstly, the Colombian Regional Autonomous Corporation of Cesar, which oversees environmental issues in Colombia, in mid-December instructed the country's main coal railway, Fenoco, to stop running its trains through populated areas at night to prevent disturbing residents.
Sources said at the time that the restriction will delay coal shipments from Colombia by 15 days and could cut 600,000 tonnes of supply from the Atlantic market.
In addition, US Mississippi river levels have fallen to historic lows, restricting shipping on the river and further restricting the supply to the Atlantic market. At the same time, on the European side of the Atlantic, high river levels were also restricting shipments of coal across Germany.
Meanwhile, six wagons of a coal train travelling from the Australian Boggabri mine to the Newcastle port derailed at the end of November, shutting down the rail line for four weeks. This provided some support to the Australian coal prices, with ICIS FOB Newcastle December '12 index out-turning at $94.25/tonne, compared to the November '12 index at $86.592/tonne. MV
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