Against all the odds, falling European spot prices prove once again that markets do not perform the way we expect them to. The behaviour of European coal markets, contrary to anticipations, is puzzling. Due to higher winter consumption, stockpiles at most European ports have dropped considerably. Nevertheless, coal prices remain low.
At the largest European discharge terminal, EMO Rotterdam, stocks in the second week of February fell to 3.6 million t, compared to 4.2 million t in the second half of 2009. Generally, falling European stockpiles should exert upward pressure on CIF ARA prices. This time however, prompt CIF ARA prices sank to just above US$ 70/t by mid-February and although they made a marginal improvement to US$ 73.75/t two days later, they kept very much in line with a flattened demand status quo.
South African spot coal price firmed slightly during the third week of February, at around US$ 83/t FOB after it dipped to US$ 80.75/t the week before. A further recovery was seen during the last week of February and the beginning of March, as prices touched US$ 85/t before dropping marginally to US$ 84.50/t. Judging by the level of activity in the European market, where most consumers still have stocks that will last until winter-end, traders expect the spot market to remain depressed into the second quarter of the year. Recovery is expected only in the last quarter of 2010 as European winter approaches and the Indian monsoon season ends.
Exports will fall
South African exports to China are expected to fall this year. In fact we have already seen a tapering off in Chinese demand for coal imports since the high import levels seen during the latter half of 2009, when Chinese buying of imported coal was the driver of the price that made the Richards Bay spike of US$ 94/t in early Jan 2010. Stockpiles at Chinese sea ports have increased considerably, due to heavy fog conditions. Meanwhile, the queue of ships waiting to load coal at affected ports continues to grow, which dampened demand considerably during February and contributed to lower than expected export prices.
Chinese imports are forecast to remain comparatively low for the rest of the year compared to last year, as domestic prices begin to fall and coal consumers are still awaiting the delivery of Indonesian coal cargos, contracted during December and January.
Chinese coal production will increase
According to the National Energy Bureau of the National Development and Reform Commission (NDRC), Chinese coal production is set to increase by 5% in 2010, with the country’s national coal production expected to reach 3.2 billion t. Higher local production in China will further weaken demand for imports, and hence play a role in constraining the South African export price.
Indian buyers may be contributing to the current spot price recovery as coal shortages continue, inducing power utilities to approach the market more aggressively in the run up to the Indian monsoon season. The RBCT FOB spot price is expected to remain between US$ 80/t - US$ 90/t during the rest of the quarter, given lower European and Chinese demand forecasts. Furthermore, higher coal stockpiles at European power utilities coupled with lower European gas prices should dampen spot prices in the short term.
Author: Xavier Prevost, Senior Coal Analyst, XMP Consulting.
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