Using our regional coal market analysis, we explore near-term supply and demand conditions and test future price floors
In the weeks shortly before and after last month's Coaltrans World Conference in Copenhagen, it became clear that we were witnessing a trend reversal within the thermal coal market.
In the past, physical European (ARA) thermal coal spot prices crept up as the conference approached, typically sinking by 5% once it ended, as market participants used the draw of the event to conclude deals with prospective buyers.
Yet this year, ARA prices dropped by US$15/t (17%) between February and November, falling all the way through October and reaching a low of US$70/t following Coaltrans.
This has been driven by exchange rate fluctuations – in particular, the rapid depreciation of the Russian Rouble (RR) and a weakening South African Rand (ZAR) against the US Dollar (USD) – as well as uncertain Asian Pacific demand and low freight rates.
However, our cost curve reveals that there is potential for delivered prices into Europe to fall even lower due to a variety of different pressures.
Firstly, as we move through winter, demand will begin to decline as more power plants in North West Europe retire, while newer ones in the Netherlands and Germany face start-up delays.
On the supply side, expansions in Colombia at the lowest end of the curve will push higher cost supply further to the right, making them unprofitable and effectively lowering the price of the marginal tonne.
At the mid-to-high end of the curve, US suppliers will still look optimistically to the export market but will likely retreat with low margins as contracts expire.
This will be exacerbated by the descent of the Rouble which has worsened through November, touching an all time low of 47:1 RR:USD. Russian high-cost supply dominates the marginal tonne, so as exchange rates weaken, the delivered price falls with it.
Consequently, we see two price floors emerging. One in which the mid-range of the curve would accommodate a price as low as US$66-67/t. Around this pricing level, we begin to hit break-evens for the lowest cost US Illinois Basin suppliers who are keen on keeping volume flowing into Europe as they expand operations.
However, there is further downside on a spot basis. A 'spot floor' - for which we may only see one or two cargoes – could be priced all the way down to US$60/t for large volumes of South African and Colombian coal sold into Europe.
Now that prices are at multi-year lows, it's clear that recovery will be a contracted process.
Testing price floors in the European thermal coal market [Subscription Required]
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