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European index declines despite Colombia worries

29 Nov 2013 18:03:23 | csd

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Uncertainty over Colombian coal exports in the first quarter of 2014 defined the coal market in November. Traders active in the European market waited for more clarity from the Colombian government and coal producers regarding the law, obliging coal producers to build direct ship-loading infrastructure by 2014 or risk losing their licence.

This means that US-headquartered Drummond – which has invested $350m in its Colombian ship-loading infrastructure but fell behind schedule because of strikes earlier this year – may temporarily lose the right to load vessels.

Over the course of the month, it initially emerged that Bogota will not grant an extension to the country’s coal producers if they fail to build direct ship-loading infrastructure by the new year. However, this was immediately followed by reports that the government was actually looking for a way around the law because, should Drummond lose its licence, Colombian coal exports would drop significantly and the country would lose out on the export fee it charges.

As a result, market participants were cautious and only nine index-qualifying DES ARA deals were reported throughout the month. But despite the significant risk to supply, prices remained far off the $90.00/tonne high recorded in the previous month and ICIS DES ARA November ’13 physical index out-turned at $84.269/tonne, slightly below the October ’13 index at $84.35/tonne.

Strong demand for South African volumes reported in October continued to have an effect on FOB RB physical market in November. Although at current prices, the FOB RB 6,000kCal/kg NAR coal does not price into Asian or European markets, lack of offers kept the market supported in November. The rally recorded in October when both physical and financial FOB RB values edged over $90.00/tonne has left the majority of market players short. Additional support was provided by the fact that if Colombian supply is disrupted at the beginning of 2014, European buyers will most likely turn to South Africa for their deliveries. So the ICIS FOB RB November ’13 physical index inched above the October index to settle at $82.67/tonne.

The FOB Newcastle physical coal market was immune to Colombian supply issues and although spot prices rose, the majority of deals reported were most likely the result of European utilities looking for arbitrage opportunities. Because the majority of Newcastle high quality coal is tied into long-term supply contracts with Japanese utilities, the market is unlikely to grow significantly in the coming years. However, with Chinese domestic prices rising, Chinese buyers have entered the international markets looking for 5,500kCal/kg NAR Australian coal. Increased demand for the lower quality product could add support to the high quality coal, sources said. This is because the 5,500kCal/kg coal takes precedence in the supply chain, so when demand for such coal is high, less of the higher quality material becomes available at the port, thus underpinning its value.

The ICIS FOB Newcastle November ’13 physical index was calculated at $84.814/tonne, up from the October ’13 index at $82.56/tonne. Manca Vitorino

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