Coal prices weaken on healthy supplies, weak demand

Updated : 22 May 2012
Source :Commodity Online
NEW YORK (Commodity Online): Weak demand and fairly healthy supplies across Atlantic and Pacific region has weakened the prices of coal in 2012. European coal prices are down 21% in the first four months of 2012, according to Barclays Capital.

Barclays has revised the European prices outlook for 2012 for prompt CIF ARA to $94 per ton from $102 per ton, and to $92 a ton for 2013 from $105/ton forecast earlier.

FOB Richards Buy price forecasts have been forecast to decline to $97/ton from $102 for 2012 and $94/ton in 2013. In the Pacific, Newcastle, the prices are to average $105/ton in 2012 (down 6.5% from $112/ton & $108/ton in 2013).

While H1 11 was all about supply disruptions driven by adverse weather, 2012 so far has been about a healthy supply selling into a fairly weak demand side. Global demand for coal has been moderate, with a warm winter across the northern hemisphere only being partially offset by a cold spring. The lower winter heating demand has been compounded by lower global economic growth, which has slowed the pace of demand growth, Barclays Capital said.

European demand has been further eroded by the displacement of thermal generation due to increasing levels of renewable generation."In terms of the latter, the EU has had 50 GW of renewable capacity come online in 2010 and 2011, and we still forecast about 20 GW to come online in each of the next three years. While coal demand has suffered as a result, relative fuel prices in Europe show gas has become more expensive and have kept coal as the most competitive form of generation across Europe," Barclays Capital report said.

While moderate demand has been part of the global story, the bigger part has been the recovery and ramping up of coal supply, driven by some base effects that lowered H1 11 supply and the results of investment across the coal production chain that led to production expansion. The Atlantic Basin has been most affected, with Colombia on track to add some 5 mt of supply this year, while a very weak domestic coal market in the US is driving increased pressure for exports from that market. Add incremental supply from South Africa (2.5 mt in Q1 alone) and Russian cargoes has pushed down European benchmark prices. The competition for that European market has seen the higher cost production from Russia starting to be priced out first, with the low-cost Colombian volumes now putting pressure on US volumes as prices continue to fall.

While Asian demand has tended to be the key source of price support, even a 12 mt y/y increase in Chinese steam coal imports in Q1 12 was not enough to support prices given the healthy supply. The import growth y/y does hide a q/q reduction of almost 6 mt, which has come despite price reductions for the Pacific basin benchmarks, which, if anything, widened the arbitrage window into the south of the country over the previous quarter. With Indian demand still recovering February showing the greatest imports of South African coal since November 2010.

"Indian imports will see some initial resistance to further increments as the weak rupee and low power prices remain issues for the sector; however, given the structural issues, we would expect imports to increase substantially through 2012 and 2013," Barclays report added.