Coal set to plateau after reaching floor – importers
European coal prices have likely reached their floor this year, though they may stay weak for some time before entering an uptrend, German importers told Montel this week.
“We won’t see a return to prices in the USD 40s (per tonne) – I think that was the bottom. But prices in the 50s and 60s should be expected for the rest of the year,” said Franz-Josef Wodopia, managing director of the German coal importers’ association (VDKI).
Broker Global Coal’s benchmark DES ARA index of European coal prices was last seen at USD 59.35/t, down 31% since the start of 2019. Last month it hit a three-year low of USD 48/t.
The coal market has come under pressure from cheap gas that has made the fuel more competitive as a form of power generation this year.
An oversupply in the world’s production of LNG had seen deliveries to Europe more than double to 40m tonnes over the first six months of the year, according to Rystad Energy.
With gas prices in Europe down by half, coal generators had been priced out of the market, slashing hard coal-fired power generation in Europe’s biggest economy by 24% over the first half of the year, according to Fraunhofer ISE data.
Add to this carbon costs approaching a record EUR 30/t and the present constellation of gas, hard coal and emissions prices would lead to at least a partial “market shake-out” of German power plants, said Wolfgang Cieslik, a board member of German utility Steag.
“We have quite a heavy competition from the gas side – a touch unexpected I would say,” said Alexander Bethe, a vice chairman of the VDKI and appointee of Jera Global Markets, a seaborne energy trading joint venture between Japanese and French utilities.
This competition now meant coal prices were effectively following LNG, which in turn was highly sensitive to weather forecasts, he added.
“We are so much relying on the weather these days that we cannot really say if the price will improve or not.”
Mild northern hemisphere weather combined with increased LNG supply had kept gas storage volumes elevated in Europe and Asia so far this year. A return to more normal conditions this winter could prove enough to send prices for the fuels rising again, Bethe said.
“Per definition the monthly trend structure is still bearish this year, with its lower highs and lower lows,” said Tom Hovik, head of technical analysis at Montel.
However, with the front-year API 2 futures contract currently trading at a two-month high of USD 70.75/t, coal was in a position to claw back much of this year’s losses provided the paper market closed above USD 67.15/t at the end of this month, he added.
Forward markets for coal show prices climbing for longer-dated contracts. Yet this was not itself reason to assume the fuel could only become more expensive in future, said Bethe.
“The forward market is in contango [longer-dated contracts worth more] but we have seen forward markets continually shift in parallel,” he said. “We will be in a kind of price valley now – for how long I couldn’t tell you.”