European coal futures fall below $85/tonne

LONDON, June 25 Tue Jun 25, 2013 6:13am EDT

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LONDON, June 25 (Reuters) - Coal futures prices fell below the psychologically important $85 level on Tuesday, their lowest since December 2009, putting further pressure on producers to cut supply.

API2 coal futures for 2014 delivery, the main benchmark used by European power generators for buying the fuel from the forward market, fell to $84.45/tonne this morning, down around 17 percent since the beginning of the year.

Coal derivatives have been one of the worst performing commodities this year, Reuters data shows.

Coal is the world's most used fossil fuel for power generation. The price drops mean that coal is much more attractive for European power generation than gas, its main fossil fuel competitor.

German electricity for sale in 2014 generated from coal is now around 25 euros ($32.84) per megawatt-hour (MWh) more profitable than gas-fired power production, Reuters data shows.

Sliding coal futures prices, fears that China's demand for commodities will slow, and the likelihood that President Barack Obama will announce tougher curbs on coal-fired power plants in a major speech on climate policy later on Tuesday have worsened the outlook for the coal mining sector.

The latest coal price drops extended a long lasting downward trend of almost 6 percent since the beginning of the month and more than 35 percent since spring 2011, when prices last peaked.

Traders said that further drops were possible as the market continues to react to abundant coal supplies, slack global demand as well as 8-year low prices for electricity in Germany.

Outside the eastern U.S., major producers of coal have been reluctant to make big production cuts this year as the costs of closing mines are high, while many producers are locked into 'take-or-pay' contracts with railways and ports that can make it more expensive not to produce coal.

Weaker currencies in Australia, Russia and South Africa have partly insulated coal producers from the impact of sharply lower dollar-denominated coal prices.

Analysts say big mining conglomerates are also reluctant to be the first to make big production cuts to prop up the market, because they have to deal with the costs of closing a mine while rivals could benefit from any resulting higher prices.

However some producers - particularly in the U.S. - may have no choice to shut mines as their financial state becomes even more parlous, traders and analysts said.

Shares in U.S. coal miners Peabody and Arch Coal fell 8 per cent and 5 percent respectively on Monday.

Coal is the world's most used fossil fuel for power generation and late last year the International Energy predicted that it could overtake crude oil as the largest source of energy by 2017.

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