UPDATE 1-European coal futures fall below $85/tonne

Tue Jun 25, 2013 10:56am EDT

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By John McGarrity

LONDON, June 25 (Reuters) - Coal futures traded below the psychologically important $85 level at one stage on Tuesday, hitting their lowest level since December 2009 and 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 an intraday low of $84.45/tonne, down $0.70 on Monday's close and around 17 percent lower than at the beginning of the year.

"Concerns about weak demand and the abundance of supply helped push coal under $85, and losses in other commodities and a stronger dollar also piled on the pressure," a trader said.

The contract later recovered to $85.00 on the back of a stronger physical coal market and a slight rebound in German power prices from Monday's eight-year low.

Coal derivatives have been one of the biggest declining commodities this year, Reuters data shows. Coal is the world's most-used fossil fuel for power generation and the price drops make it more attractive for European power generation than cleaner-burning 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, coupled with fears that China's demand for commodities will slow and tougher curbs on coal-fired power plants to be announced by President Obama in a speech on climate policy later on Tuesday, have worsened the outlook for the coal mining sector.

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

Outside the eastern United States, major coal producers have failed to make big cuts in output 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 United States - may have no choice but to shut mines as their financial state becomes 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.

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