coal prices

Fear not the funds, coal analysts say
LONDON, June 24 (Reuters) - Hedge funds have piled into the booming coal market, but are chasing already bullish fundamentals rather than creating a potentially fragile investment bubble, analysts said on Tuesday. Fund activity will give coal greater liquidity and does not spell the end of its price boom, they said. "Coal has been the best performing commodity this year, better than oil and natural gas -- that's not because of fund buying, but because the market is fundamentally strong," said Francisco Blanche, head of global commodities research at Merrill Lynch. "Coal is no different to any other commodity from the perspective of funds and other institutions. They look for opportunities," he added. "It's been a one-way trade for coal this year. We don't see that changing in the near-term." Coal was for long seen as a backwater in the enery complex and over the counter derivatives trading took off less than five years ago. Unusually for a commodity market there are no more than a handful of traders of substance in coal, and only one physical broker of any size. Traders say attitudes can be conservative among the established market players. They point to concern that coal may echo oil, where speculation has been blamed by producers for inflating a price spiral increasingly unrelated to supply and demand realities. "The funds invest huge amounts of money but when they pull out, they pull out quickly and prices plunge," one senior European utility source said. "It's happened in other markets and the funds getting into coal probably means the end of the boom is in sight." But fund sources and traders counter that speculative froth has already left the market and funds now hold long positions as passive investors sitting tight. "A lot of banks and funds bailed out six months ago when prices dropped $20," a fund source said. "Those still holding long positions are the ones who won't panic and dump positions. It's being held in strong hands." HIGH PRICE The bedrock of funds' positions is a tight market and prices set to keep rising, traders said. Physical and coal derivatives prices have set new record highs throughout this year. Physical coal has been in extremely tight supply around the world. Production and logistical bottlenecks mean supply is unlikely to catch up comfortably with demand for several years. Prompt physical coal cargoes for delivery into Amsterdam-Rotterdam-Antwerp were trading at around $67.00 a tonne in January 2007. Prices doubled to around $130.00 by January 2008 and have been bid and offered at around $200.00 during the past week. South African coal cargoes were trading at around $50.00 a tonne free-on-board Richards Bay in January 2007 and recently traded above $150.00 a tonne FOB. "Unless countries with booming coal demand like China or India cut demand in response to inflationary pressure -- which, frankly, we doubt -- there's no likelihood of a sharp price fall which would encourage people to liquidate," one hedge fund source said. "Coal is clearly tight as a drum and getting tighter. The coal market is adjusting to fundamental tightness and is re-pricing itself," he said. "Producers and the big traders are not selling further down the curve for 2009, 2010, 2011. That tells you all you need to know - they believe prices are going higher," a swaps trader said. For 2008 some analysts predict a global shortfall of 10-15 million tonnes of thermal coal. This is a small percentage of annual global trade of around 700 million tonnes but marginal spot trade dictates prices. "Hedge funds do a lot of homework. They don't just pile into a market. They do a lot more fundamental research than many people realise," said Kevin Norrish, commodities analyst at Barclays Capital. "The funds are following the fundamental trends, not distorting them," he said.
source: Reuters 24 June 2008