Physical coal comment: Oversupply keeps DES ARA spot below $80/tonne
While European April coal prices remained below $80.00/tonne because of an oversupplied market, South African spot prices managed to recover slightly this week as some Indian demand emerged.
Australian prices were mixed as the latest market talk suggests that the annual price negotiations between Japanese utilities and Australian producers will settle at the lower end of the potential range.
Prices for DES ARA front-month cargoes were consistently below the psychologically important $80.00/tonne mark. On Thursday, two 50,000-tonne April '13 cargoes traded at $79.70/tonne, just $0.20/tonne higher than the previous such trade, which dealt at $79.50/tonne on 21 March.
On the other hand, two April '13 FOB RB cargoes traded at $80/tonne or higher during the week.
European prices reflect an oversupplied market, which traders agreed is, in particular, because Colombian exports have returned to normal after their recent disruptions. Meanwhile, Indian demand has emerged to lend a degree of support to South African prices.
In addition, several traders pointed to one company as "marketing South African coal aggressively into Europe". One trader said that, on the face of it, shipping more expensive South African coal into Europe, where prices are cheaper, would mean a loss of potentially $7.00/tonne to the company.
Activity on the paper markets showed a similar dynamic, with CIF ARA Q2 '13 trading below its equivalent FOB RB contract, leaving the implied freight rate in negative territory. In theory, one trader said, this would mean that "the freight company will have to pay the company to transport coal with them".
However, as the company in question is involved in South African coal production operations, he added: "They need to ship the coal somewhere and, if Asian demand is not enough to take it, someone in Europe will."
Even though most of Europe has been subjected to a late winter in the past couple of weeks, leading to an increase in electricity demand, this would only partially translate into higher coal burn, a second trader said.
In Germany in particular, wind power generation mitigated against the higher electricity demand.
While utilities should start restocking their coal for next winter in May, the second trader questioned how much effect that activity will have on prices.
Even though South African April cargoes traded higher week on week, prices for coal to be shipped in May were down by $2.50/tonne from the previous similar trade, which dealt on 12 March.
In, addition, four FOB RB Year 2014 cargoes changed hands this week, starting on Monday at $89.50/tonne, which was $2.25/tonne lower than the previous such trade, on 6 March. Despite a $0.50/tonne price increase for the next two cargoes, both dealing at $90.00/tonne, on Thursday, the fourth cargo traded again at the initial $89.50/tonne.
Although several traders pointed to Indian demand as supporting South African prices, the reluctance of Indian buyers to pay high prices could limit the upside potential for Richards Bay prices, one trader said.
In addition, Societe Generale said in its latest research report: "India has shown a much higher degree of price discrimination in 2012 than in the recent past. For 2013-14, we expect Indian demand to continue growing but also to remain price sensitive."
FOB Newcastle May coal prices softened during the week, whereas the port's June cargoes traded higher. A Newcastle July '13 cargo traded at only $0.10/tonne higher than the June '13 cargo.
With the annual supply price negotiations between Japanese utilities and Australian producers still in progress, sources told ICIS that the Japanese utilities are bidding at $95.00/tonne and Australian producers are offering at $96.00/tonne. While the bid is unchanged from last week's market talk, the potential offer is down from the previously floated $102.00/tonne.
Referring to the recent spell of demand for Australian coal, one trader said prices in the Pacific market could have more downside once the annual price negotiations are concluded as "some producers were making it look a bit tight". Martin Degen
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