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Shippers eye European coal import boom to support freight rates
January 10, 2013 / 4:47 PM / 5 years ago

Shippers eye European coal import boom to support freight rates

* European utilities turn to cheap coal to generate power

* Export glut has depressed coal prices whilst gas remains tight

By Henning Gloystein and Jonathan Saul

LONDON, Jan 10 (Reuters) - Rising coal use in Europe is expected to boost demand for imported hard coal and could help lift seaborne freight rates, giving welcome support to a market that has been dogged by the global economic downturn and a ship glut.

Healthy coal supplies from exporters such as South Africa, Russia and the United States have led to a sharp drop in prices, boosting coal demand in Europe over the past year, despite a sluggish economy.

Analysts say prospects for firmer coal demand will lend support to the dry bulk freight market, which has faced one of its worst ever downturns - hit especially by a surplus of vessels ordered when times were good.

“Coal demand is forecast to remain robust through 2013. In Europe, coal prices are expected to remain competitive against natural gas, supporting our forecast for continued import growth,” said consultants Maritime Strategies International.

In Germany, Europe’s biggest economy and power electricity user, hard coal use was up 0.6 percent last year, while demand for natural gas, coal’s main competing fuel for power generation, was down 2.3 percent.

Shipping analysts expect the positive import environment to provide support for panamax vessels, which usually transport 60,000 to 70,000 tonne cargoes of coal or grains.

Peter Norfolk, research director with broker Freight Investor Services, said coal exports from the United States to Europe had provided some support for panamaxes last year.

“The U.S. will still be an important source and you will still get a lot from Russia later in the year,” he said, referring to winter weather restrictions in Russia.

In the United States, the shale gas revolution has led to a collapse of domestic natural gas prices and forced American coal miners to look overseas for coal buyers.

Russian coal exports increased by around a fifth last year to 125.7 million tonnes despite weak world prices, according to the Russian Energy Ministry.

Adding to these healthy supplies, South African coal miners exported 68.3 million tonnes of coal in 2012, up from 65.5 million tonnes the previous year.

CHEAP COAL BOOSTS DEMAND

Because of the oversupply in the coal market, API2 2014 coal futures contracts have been in a downward cycle since summer 2011 and have dropped almost 30 percent since then to around $100 per tonne.

Analysts say that although a bleak economic outlook for 2013 would hamper demand, the low coal prices will lead to further increases in demand in Europe and Asia.

“The strong supply side has stimulated demand. We expect European takes to be up by some 15 million tonnes, Indian imports to rise 18 million tonnes and Chinese imports to increase by an impressive 40 million tonnes year-on-year,” British bank Barclays said in a research note in late December.

At the same time as coal is cheap, European gas markets are tight as buyers have to compete with Asian utilities for imports of liquefied natural gas (LNG) and pipeline supplies from Russia and Norway are also tight.

As a result, coal is much more profitable for electricity generation in Europe than gas.

German forward power generation is currently around 20 euros ($26.09) per megawatt-hour (MWh) more profitable than gas, and in Britain the premium is almost 18 pounds ($28.82) per MWh, according to Reuters data.

Analysts say that utilities will take advantage of this spread and buy more coal for use in power stations, boosting demand for the commodity, whilst reducing gas use.

Deutsche Bank said this week that it recommended a long thermal coal and short UK natural gas trading position.

“Although our price forecasts do not suggest that either one of the legs of this trade are justifiable on their own, we believe that the relative value between thermal coal and European natural gas favours the proposed trade both in terms of the comparative value received by a utility for power generation, and also in terms of the cost of production for the two fuels,” the bank said in a research note.

WEAK COAL OUTLOOK AFTER 2013

Despite this potential support for coal and freight markets, analysts say that the longer-term outlook remains bearish as an oversupply of coal will clash with falling demand.

“We expect reductions in imports to come from Europe (as environmental legislation results in the closure of some older coal plant and economic growth remains stagnant) and, more importantly, China, as investments in alleviating domestic transportation constraints will come to fruition in 2014,” Barclays said.

“We expect the latter to allow a reduction in Chinese coal imports of some 35 million tonnes in 2014.”

Freight Investor Services’ Norfolk said separately: “There is still a huge volume of panamax ships, not quite as many as last year, on order for delivery in 2013 and that is going to be the stumbling block for freight.”

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