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European coal market ignores bullish euro currency moves

01 Feb 2013 19:09:25 | csd

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The current uptrend in the euro/dollar exchange rate has had little impact on European coal prices with other market fundamentals mitigating the effect of the EU single currency reaching its highest monthly average over the 2012-2013 period in January.

The monthly average for the rolling front year euro/dollar exchange reached $1.34 during January 2013 - its highest value according to figures collected since January 2012 (see graph).

Meanwhile, a monthly average for the rolling front year for the European CIF ARA market reached $100.42/tonne - its highest value since May 2012 but still below the high of $115.09/tonne recorded on January 2012 over the same period, according to ICIS data.

However, the correlation between the two variables has taken a nosedive over the past couple of months with the coefficient reaching minus 0.45 in January 2013, down from its high of 0.87 in May 2012 when compared to the same time frame.

The euro/dollar exchange rate has enjoyed a bullish run since July 2012 with some positive sentiment drawn from tentative steps taken by the EU's leaders to shore up the bloc's collective economies.

Positive news from the end of 2012 has included the EU agreeing on a roadmap for deeper economic integration that will make the European Central Bank the chief regulator and falling borrowing costs for indebted eurozone countries.

At the same time, the dollar was weighed down by negative market signals in America amid US budgetary concerns.

In contrast, coal prices have been plagued by an oversupplied market and waning coal consumption from China, which has kept contracts in negative territory for most of 2012 and into 2013.

This has largely eroded away any possibility of European buyers encouraged to buy more coal because of the improved currency although some positives can be drawn from the euro's bull run.

A stronger euro "has definitely helped the coal market - it is helping spot demand for cargos to Europe and improved dark spreads," said one coal analyst based at a global investment bank.

"However, it has not made a huge difference as dark spreads are overwhelmingly positive at the moment. It is also not going to increase [European] demand on a long-term basis. Supply issues make or break prices and there is a lot of coal coming in from South Africa which is putting a cap on prices at the moment," he added.

On the opposite side of the argument, a second market source felt that the improved currency was irrelevant to the coal market with other market fundamentals of greater importance. "There is no incentive to buy coal if the euro is weak. If [European utilities] need coal then they will buy it regardless - the market is more demand driven," said one coal trader based at a commodities house. "Besides, the coal market is a dollar market. Nobody goes in the market just because the euro has strengthened," he concluded.

Nonetheless, ICIS data shows that coal-fired generators have enjoyed healthy profit margins for a number of years due to a combination of bearish coal prices and a collapsing carbon market. For example, the German Front-year clean dark spread averaged €9.37/MWh in 2012, up €2.75/MWh year on year (see graph).

However, the extent to which European producers could take on more coal either through a stronger currency or improved clean dark spreads will be limited this year with coal slowly being pushed out of the European energy mix.

"I think 2013 will be the high point for European coal demand. For example, this year we will see coal plant closures in the UK while others will be converted to biomass. We will also see the LCPD [large combustion plants directive] starting to take a greater effect," said the analyst.

Recent analysis by ICIS shows that in the UK alone, wholesale electricity curves could rise by 7% as the pressure to switch from coal mounts (see sister publication EDEM 24 January 2013). CR

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