The European thermal coal futures market's partial resistance to a steep sell-off in its Asian counterpart and the consequent narrowing of the CIF ARA-FOB Newcastle price differential has highlighted the extent to which the European market does not always march in lockstep with Asia.
Traders are now reviewing the European supply-demand balance as the continent heads into its higher-demand winter period, and whether this will continue to buttress CIF ARA futures despite tumbling Asian prices.
"[Europe]-Newcastle narrowed very quickly on the Q1-17, Q2-17 came in quite a bit, it's interesting to see what people are doing on the quarterly spreads," a utility trader said. "Will the DES [ARA]-Newcastle come in a little more, if Newcastle continues to be sold at these levels?" He added further narrowing was possible if bearish sentiment from China filtered into Q1-17.
Spreads between Newcastle and CIF ARA futures prices have narrowed across the curve, as European prices have declined less steeply than their Asian counterparts during the recent price plunge. The Newcastle-CIF ARA Q1-17 spread began September at $6.15/mt, and by November 1 had hit $17.40/mt. At Monday's close, the spread had shrunk to $5/mt.
Some traders had viewed the spread as too wide for some time, but were waiting for a trigger. Until recently, European prices had largely followed Newcastle, with some influence from higher French power prices on the back of plans to carry out tests on some nuclear reactors during winter. However, just as the CIF ARA market did not match Newcastle's gains, during the recent price crash it also did not suffer the full extent of its losses.
"Europe Q1-17 went down $12-$13, versus $20 for Newcastle. Europe didn't go up $20, so it didn't lose $20," one physical trader said.
Moreover, the recent sell-off in Asia and Newcastle has been driven both by sentiment and apparent supply easing as Chinese utility buyers wait for the bottom of the market before procuring further spot cargoes. In Europe however the picture appears different, with limited supply of SCOTA-spec tonnage in the market.
"Prompt Q1-17 DES ARA still looks genuinely tight," a trader said.
"Especially when it comes to Colombian [moved to Asia] and the best December and January [physical] bids are Colombia-only." Although European prompt demand looks light, with only one major utility reportedly buying on the very-prompt, moving into Q1-17 traders report greater buying interest from other utilities.
This, combined with the supply tightness, is likely to buttress short-term European prices and therefore limit growth in the spread.
For Asian prices, the two key variables are the severity of the Chinese winter, which could both increase coal burn and disrupt domestic supply, and the speed with which Chinese domestic producers can increase supply. The market is waiting for solid information on both counts.
