Atlantic basin coal prices could drop as much as 8% over the coming month amid the prospect of increased supply and reduced generation demand due to widespread Covid-19 lockdowns in western Europe, analysts told Montel this week.
The front-quarter API 2 contract settled last at a five-week low of USD 54.20/t, down 6.4% from the end of last month, while the front year slid 7.7% to USD 55.70/t, on Ice Futures.
The latter contract on Thursday reached its lowest level since 8 September of USD 55.55/t.
“One key issue in November will certainly be if Colombian supply returns to the market,” said a coal analyst with an energy firm.
Strike action at Colombia’s key Cerrejon complex has already lasted for two months, while another two producers, Prodeco and Colombian Natural Resources, have suspended operations since May and late July, respectively, amid poor market conditions.
Workers in South Africa have also threatened widespread strike action over ongoing wage disputes with several mining companies.
“If both Cerrejon and Prodeco restart production, that could have a bearish impact on December and front-quarter] prices,” the analyst said.
“If not, we continue to need Russian supplies at slightly higher costs, especially if the winter brings an early cold spell and gas prices rise further.”
Forecaster SMHI said temperatures across western Europe would likely average 1-3C below seasonal norms for much of November.
“The second important topic is of course Covid-19,” the analyst said, noting more stringent efforts to stem the spread of the virus, through new restrictions and lockdowns, could lead to reduced power – and therefore fossil fuel – demand this winter.
But for the time being, improved coal-fired generation margins could see some upturn in utility demand for coal and therefore underpin prices.
The November clean dark spread – the profit margin for burning coal to produce power – for a German power plant of 38% efficiency was last seen at EUR -1.50/MWh, close to the equivalent gas-fired generation margin, according to Montel data.
“Currently, the darks are over the sparks in Germany during the balance of the year and front quarter, so winter temperatures and wind speed will be key to see if coal can take advantage of this margin in the near term, at least to erode the stocks,” said an analyst with a coal producer.
For this reason, gas price moves would also be a crucial driver for the coal market, he added.
“If the winter turns out to be mild and gas comes down, it could drag down coal.”
A coal strategist with a European utility agreed there were many uncertainties facing the market in November.
“I still see demand increasing month on month despite the lockdowns and supply out of Colombia is still limited,” he said, adding European stock levels would therefore erode further.
Inventories at Amsterdam, Rotterdam and Antwerp (ARA) dry bulk terminals were already seen in late October at around two-year lows of 5.3m tonnes.
From a technical viewpoint, the front-year API 2 contract could decline some further 8% in November, said Tom Hovik, Montel’s head of technical analysis.
“The market has become a bit toppish over the last few months,” he said, adding there was therefore a likelihood of prices retreating to USD 51-53/t at some point over the coming month.
For a move up to the USD 65-70/t area, the USD 61.40/t resistance level would have to be broken, he said.
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