south african coal gains temporary

http://www.icis.com/heren/articles/2012/07/04/9575354/south-african-coal-gains-temporary-implied-freight-set-to.html

South African coal gains temporary; implied freight set to widen

04 Jul 2012 13:27:08

Cross-market coal spreads, such as implied freight, could widen again as the bears return to the South African market.

Bearish sentiment in the coal markets reached its peak in the first two weeks of June, with South African coal prices plummeting as producers scrambled to reduce prices in order to attract interest from Asian buyers (see CSD 24 May 2012).

As a consequence, the Q3 '12 implied freight - the spread between the CIF (cost, insurance & freight) ARA (Amsterdam/Rotterdam/Antwerp) and FOB (free on board) RB (Richards Bay) Q3 '12 contracts - moved back up to positive values at the beginning of June as South African prices fell to their lowest level since ICIS began assessing the market, in April 2010.

ICIS data show that the Q3 '12 implied freight went from a low of minus $3.00/tonne (€2.39/tonne) on 9 May to reach $4.45/tonne on 11 June.

But over the past two weeks, the spread began narrowing, hitting $1.75/tonne at the close of last week, after South African coal prices rose sharply, despite the weak Chinese imports market.

Gains temporary

Sources polled by ICIS agreed that the main reason behind the higher South African coal values has been the strong bids from the Indian market - particularly Indian cement producers - which was bidding for small cargoes with immediate delivery.

"Because of the monsoon season, the only ships they are able to load are small vessels sailing to the east coast of India," one London-based analyst said. "They took advantage of the attractive price."

According to data reported to ICIS, the FOB RB August '12 physical contract went from trading at a low of $81.65/tonne on 14 June to trade at $92.00/tonne on Monday.

This increase in demand was assisted by short-covering in the financial coal markets, which lifted the swaps markets where the FOB RB spot financial contract gained almost $4.00/tonne last week alone.

But according to market participants, this could be temporary, as fundamental weakness remains. Chinese demand is low, with the country's domestic prices plummeting further each session.

The Indian rupee is also depreciating against the US dollar, further dampening appetite for fresh coal deliveries.

"The bigger increase in the FOB RB contract seemed to be driven by some short-covering of positions and attractive bids in the physical market for August delivery. We note that there has been little improvement in market fundamentals, with over 3m tonnes of inventories at Richards Bay Coal Terminal, and ample supplies creating a surplus at the margin," Barclays said in its latest commodities research note on Monday.

"Due to the gains in the prompt FOB RB price, its differential relative to the CIF ARA contract has narrowed, decreasing the likelihood of the arbitrage window to Europe opening any time soon."

At the same time, Australian coal remains competitively priced, with a natural freight advantage, which could make South African coal less desirable to Asian buyers.

"We think it is very likely that the rebound in the South African markets is temporary and the implied freight will widen again," a second source told ICIS. MV