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Outlook 2019: European thermal coal market looks to China for direction in year ahead

Highlights

Chinese import policy a key factor

Geopolitical uncertainty to impact demand

London — Sources in the European thermal coal market are expecting the Chinese import policy to continue to drive sentiment for the majority of 2019, although numerous factors also outside of Europe will play a prominent role in defining trade flows and price arbitrages throughout the year.

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The first few months of the year will see the European market keeping a keen eye on the Chinese import policy, looking for any sign of an extension to the import ban, which became a major factor toward the tail end of 2018.

"A lot will hinge on Chinese policy," said a European trader. "China will set the tone (for 2019)."

Elsewhere in the Pacific basin, sources said the FOB Newcastle 6,000 kcal/kg NAR price would also be a big influence on Atlantic trade flows as a wide premium for FOB Newcastle 6,000 kcal/kg NAR prices over the CIF ARA 6,000 kcal/kg NAR price could create the arbitrage for additional cargoes to Asia, as was the case in 2018.

CIF ARA FUTURES TO FOLLOW COMPLEX

In Europe, CIF ARA futures will continue to be affected by the European energy complex and the physical coal market.

A support level for the year-ahead contract was pegged around $80-$83/mt -- a level which could keep US sellers interested in supplying the ARA market.

In 2018, this level was pegged around $85/mt, and the contract averaged $87/mt through to late December.

US VOLUMES EXPECTED

Strong volumes of US coal are expected as producers took advantage of high CIF ARA prices in 2018 and reportedly sold a large amount of coal on a forward basis.

This could be somewhat impacted at the start of the year as strong domestic Henry Hub gas prices at the end of 2018 had traders reportedly looking to divert spot tons away from the export market toward the US domestic market where possible.

Rising Indian coal production is expected to continue in line with state-run producer Coal India's ambitious production targets.

The threat of lessening Chinese import demand in early 2019 will weigh on spot prices as will the increasing volumes of off-spec South African tons sold into Europe.

IMO TO REDUCE TRADE FLOWS

The upcoming International Maritime Organization global sulfur limit for marine fuels, which will drop to 0.5% from 3.5% at the start of 2020, will increasingly become a more prominent issue for trade strategy through 2019.

Although no clear solution has been found by the industry, traders expect a reduction in inter-basin trade flows, which favors Russian producers as most are able to export via terminals in the Baltic, Black Sea, and Pacific.

This could potentially threaten Colombian flows to Atlantic markets, sources said.

ECONOMIC ISSUES TO WEIGH ON TURKISH MARKET

Not surprisingly, Turkey has a bearish outlook for 2019 as political and economic turmoil from 2018 spills over.

Turkey's credit issues for buyers will remain problematic and likely limit flows of seaborne coal into the largest Mediterranean market.

"The same issues will linger (in Turkey) next year, although anything can change as politics is so volatile," said another European trader.

"The (Turkish) economy won't grow in 2019," said the trader.

The source said coal demand from utilities will depend on the utilization of mature plants as new projects around the region have struggled to gain any traction.

"A lot will depend on global gas prices," the trader said, explaining coal could still be favored in Turkey if gas prices rise in 2019 -- as was the case in 2018.

Demand from the growing cement sector in Turkey and neighboring countries in the Middle East and North Africa is expected to grow. However, coal imports could suffer against petcoke on the back of favorable petcoke prices heading into 2019.

RECAP: SHARP RISES AND LOSSES IN ATLANTIC MARKET FOR 2018

Atlantic thermal coal markets saw sharp price rises and losses in 2018, with multi-year highs achieved in several price points.

The CIF ARA 6,000 kcal/kg NAR price peaked at $103.70/mt on July 11, the highest level since January, 2012.

Asian demand and Chinese government intervention were largely responsible for impacting the key price upswings and downswings of the Atlantic Basin market. Familiar illiquidity issues also factored unfavorably in Europe as did declining qualities of traded thermal coal, which became more prevalent than in previous years.

Globally, total seaborne thermal coal volumes rose to around 1.02 billion mt, compared with 986.6 million mt in 2017, according to S&P Global Platts Analytics data.

Of this, 229 million mt was imported by countries in the Atlantic basin, down marginally from 233.4 million mt in 2017. For 2019, this figure is expected to rise to 239.1 million mt.

CIF ARA PRICE FLUCTUATES

European-delivered CIF ARA coal prices trended lower for the first three months of the year as the end of the winter heating period in Europe and high volumes of coal contracted to the continent created a slight oversupply situation. Furthermore, the Chinese New Year kept global activity muted throughout this time.

Platts CIF ARA 6,000 kcal/kg NAR assessment began the year at $98/mt and fell to a 2018 low of $76.70/mt on March 28.

The European market started to trend higher in April as the supply overhang slowly cleared, and an open arbitrage to Asian coal markets further helped remove some volume from the Atlantic Basin.

After this period, supply constraints at most origins coupled with healthy demand from Asia remained the key drivers for the remainder of the year, while favorable generation margins in Europe supported demand and kept prices trending at relatively high levels.

RHINE LEVELS FALL DRAMATICALLY

A heatwave across Europe provided further support to prices during the summer months and also created one of the key market drivers for the remainder of the year -- low Rhine levels.

Severe logistical issues created by low Rhine levels began in June/July, and were still impacting the European market through to December.

The problems caused by this saw coal stockpiles at ARA swell to multi-year highs and some terminals were unable to accept any deliveries, while additional delivery coasts for barges and rails were somewhat offset by strong margins for coal-fired generation.

Despite these firm margins -- which hit multi-year highs during the period -- the overwhelmingly bearish sentiment eventually took hold in late October, aided by confirmations of import restrictions in China, beginning a very sharp price decline.

The CIF ARA price lost $21.35 in just four weeks from October 24 - November 21, to $80.45/mt.

Such steep losses were last seen during the 2008 economic collapse, and the market appeared to have found a price floor after bottoming at $78.95/mt on November 23.

TURKISH DEMAND DROPS

The Turkish and wider Mediterranean import markets largely followed price movements in Northwest Europe as most buyers purchase on an index-linked basis.

Turkey was greatly impacted by geopolitical factors, particularly in the second half of the year. For the six months of 2018, there were expectations that the environmental ministry would be raising the maximum sulfur cap allowed for power generators, which had many expecting import volumes to swing toward high-sulfur US coal, supplanting Colombian coal, which is the traditional origin for Turkish buyers.

The remainder of the year was decidedly bearish as the reelection of President Erdogan, import tariffs and a depreciating Turkish lira against the US dollar all weakened the market. Furthermore, the slowing economy has led many to expect lower cement demand for 2019, a key industry for thermal coal and petcoke imports.

--Joseph Clarke, joseph.clarke@spglobal.com

--Piers De Wilde, piers.de.wilde@spglobal.com

--Joseph Clarke, joseph.clarke@spglobal.com

--Edited by Ikhhlaq Singh Aujla, newsdesk@spglobal.com