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Physical coal comment: RB spot prices rise with no power expected at RBCT until Saturday

07 Feb 2014 13:32:10 | csd

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A power outage at Richards Bay Coal Terminal lifted South African physical coal prices in week 6 as producers were forced to declare force majeure on their deliveries when the terminal announced power was not expected to return until 6am local time (4am London time) on Saturday.

The export terminal, with an annual export capacity of 91m tonnes, had to suspend all operations on 31 January after a power failure on the two cables supplying electricity to the terminal. RBCT initially expected power to one cable would be restored by Wednesday, with the second one following on Thursday. However, by Thursday morning, the return date had been postponed until 6pm on Friday, followed by a further delay to 6am on Saturday, announced on Friday morning. The terminal is now expected to return to full capacity on Sunday as it takes around 24 hours for operations to resume.

The long outage lifted South African physical coal prices, with bids for February-loading cargoes rising to $86.00/tonne on Thursday from $84.50/tonne reported in the previous session. The contract last traded at $81.00/tonne on 31 January.

Meanwhile, prices of FOB RB March-loading cargoes peaked at $81.75/tonne on Thursday, up sharply from a deal at $79.75/tonne recorded in the previous week. Similarly, an April cargo traded at $79.50/tonne on the day, up $4.00/tonne compared to a deal reported on Monday.

Throughout the week sources debated the strength behind the deals with a majority agreeing the moves appeared overdone and largely driven by sellers concerns over potential fines they will face if they are late delivering their cargoes. In fact, physical traders told ICIS that several South African coal producers have declared force majeure on shipments on Thursday because of the delays caused by the week-long outage. “There are problems for Transnet to supply coal by rail with this outage. Hence producers cannot make the shipments on time, which is a good reason to call force majeure,” one physical trader said. If they decided not to declare force majeure or if they were unsuccessful they would have to pay fines for not delivering their coal on time. “If a seller issues a force majeure he can get out of contract without paying the cost,” one trader explained on Wednesday.

One Swiss-based trader was again seen buying large amounts of RB coal although sources said there was no explanation why the trader only got involved on Tuesday – when the market had already risen substantially – and not last Friday when the outage at RBCT started. Power outage alone also does not explain why April-loading physical cargoes should rise so sharply, as the terminal expects the backlog, caused by the outage, to be cleared in a couple of weeks, leaving April deliveries completely unaffected.

RBCT typically shifts 200,000 tonnes of coal a day (but has the capacity to increase this to 250,000 tonnes), which means the outage will cause a 1.6m tonne gap in exports. On Thursday, five ships were alongside, ready to load, with another 23 sitting at anchorage and an RBCT spokesman told ICIS the backlog will take several weeks to clear.

However, one coal market source assessed a 1.6m tonne backlog as relatively small, while a second source added it should not take more than a week for the terminal to work through it.

“People are not committing to laycans [dates on which a vessel must be ready to load], which is affecting market confidence. But market prices have been largely sentiment driven. It is all a little bit artificial,” the second source added.

In the Atlantic basin, fixed-priced DES ARA spot physical deals were steady over the course of the week, although a DES ARA April ’14 cargo reportedly changed hands at $1.80/tonne above index level on Thursday, indicating that the bullish South African sentiment had leaked into the European market.

Sources said this was even more baffling than the sharp rise in the South African market. Colombia’s Drummond will likely resume ship-loading operations before the end of March and while that means that the first Drummond cargoes would not arrive in Europe until the end of April, this has already been priced in.

The power outage failed to put any pressure on the Australian coal market, however, with hardly any activity recorded throughout the week as China – and many other Asian countries – celebrated the Chinese New Year holiday. Two FOB Newcastle March ’14 deals changed hands at $78.25/tonne and $78.00/tonne on Monday – below the $79.38/tonne midpoint reported on 31 January – with only sporadic bids or offers recorded later in the week, which failed to give a real sense of market direction. Manca Vitorino

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