Demand destruction to further depress coal prices in March

European coal prices will remain at around multi-year lows in March on concerns the deadly coronavirus will further erode global demand and amid still low gas prices and ample supply.
The API 2 front-month contract has dropped 4% since the end of January to USD 46.20/t – the lowest on a rolling basis since May 2016 – on Ice Futures.

The Cal 21 had fallen 5% to USD 56.75/t, only marginally higher than Wednesday’s contract low of USD 56.20/t.

“The fundamentals aren’t positive and could get weaker depending on coronavirus impact on demand,” said independent coal analyst Plamen Natzkoff, also pointing to the bearish influence of weak freight rates.

The Baltic Dry Index – which tracks global dry freight rates – was assessed last at 529 points, around 45% lower than at the start of the year, with already relatively weak global commodity demand and surplus tonnage exacerbated by the spread of the deadly coronavirus – known officially as Covid-19.

“I think coronavirus will be the main driver [of API 2 prices in March] simply because it is beginning to affect everything else,” said an analyst with a European coal trading firm.

“While weather will of course play a role, as the cases of the virus spread across Europe, we could see it start to affect demand as control measures are implemented,” he added.

Swedish forecaster SMHI said temperatures across western Europe would average slightly above normal for the time of year throughout March.

Weak demand
“Fundamentally, the picture hasn’t really changed since last month,” said a coal analyst with a UK-based consultancy, adding demand for coal in northwest Europe remained “muted”, as cheap gas was highly competitive compared with coal, for generation purposes.

The March clean dark spread – the profit margin for coal, including the cost of carbon – was last seen at around EUR -3.55/MWh for a German power plant of 38% efficiency, according to Montel data.

The equivalent gas profit margin – or the clean spark spread – was at EUR 6.30/MWh.

“Some demand from China is supporting the global [coal] benchmarks at the moment and that might be keeping a floor for API 2,” he said, adding the only potentially bullish drivers would be colder weather over the coming weeks or gas prices reaching a floor.

Strike threat
Meanwhile, the prospect of strike action by Colombian miners over the coming weeks – amid ongoing worker negotiations with key producer and exporter, Cerrejon – might offer some support to prices, said market participants.

But even in the case of industrial action being announced, the impact on European prices could be negligible, they added.

“Colombia strikes are a real threat but in absence of demand, I don’t think we will have a significant impact,” said an analyst with a coal supplier, adding the coronavirus was “definitely top of the headlines”, with traders eyeing the potential impact on demand outside China.

“On the possibility of a strike, all I can say is there is always a chance of a strike in these situations but we are all aware of the threat,” said the analyst with a European coal trading firm.

“Overall, I think the drivers are largely flat with no clear direction currently emerging.”
Source: Montel