COLUMN-Asian coal curves shift to contango offer price hope: Clyde Russell
--Clyde Russell is a Reuters columnist. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, May 1 (Reuters) - There is a glimmer of hope for Asian coal miners with the forward curves for various grades of the fuel starting to point to higher prices in the second half of the year.
The price of spot coal at Australia's Newcastle Port, an Asian benchmark, was $73.12 a tonne in the week to April 25, down about 15 percent so far this year and close to the four-and-a-half-year low of $72.98 hit in March.
But while spot coal has been weakening for the past few months, the shape of the futures curve has gradually been shifting to contango, where the price for further-out months exceeds that for near-month contracts.
The front-month Newcastle coal contract traded on ICE Futures Europe <0#NCF:> was at a discount of 3.9 percent to the six-month contract on Thursday.
Three months ago the curve was in backwardation, with the front-month at a 3.4 percent premium to the six-month.
The shift to contango would normally be taken as a bullish indicator that prices are more likely to increase in coming months than decline.
But it's not just the thinly-traded Newcastle futures that have flipped to contango. The Indonesian sub-bituminous strip <0#SUB:>, which tracks prices of low-rank coal, has also switched in the past three months.
The front-month contract was at a 0.8 percent discount to the six-month on Thursday, while three months ago the front-month was at a 4.1 percent premium to the six-month.
The Argus API8 contract, which measures the price of 5,500 kilocalorie coal delivered to south China, is still in mild backwardation on the front-month to six-month spread, although it has shifted to contango from the seventh month onwards.
The front-month API8 <0#CRFR:> was at a premium of 0.5 percent to the six-month on Thursday, whereas three months ago the premium was 5.2 percent.
What the curves are showing is that the market is no longer anticipating that coal prices will continue to fall, although the mild contango certainly isn't suggesting much of a rally.
For prices to recover it would take some re-alignment of the supply-demand balance, currently characterised by plenty of supply meeting only modest growth in demand.
The response of many producers in Australia and Indonesia, the world's top two coal exporters, to low prices has been to boost output in the hope of lowering unit costs per tonne mined, thereby boosting profitability.
The problem with this tactic is that while it may work for a single miner or even a small number of miners, when everybody is doing it, supply swamps the market, pushing prices lower and quickly eroding any productivity gains.
Thus the coal market remains over-supplied, even at the current low prices. For prices to gain, it would take an uptick in demand, and here the outlook may be somewhat brighter.
ASIAN DEMAND OUTLOOK IMPROVING
Demand in top importer China may increase in the second half, in line with expected stronger economic growth.
Domestic coal prices at Qinhuangdao increased slightly in April to around 535 yuan ($85.48) a tonne, up from levels around 520 yuan in March, and port inventories were reported to have fallen.
A change to tax on domestic output from a volume to a price basis may boost China's coal prices by between 11 and 55 yuan a tonne, which in turn would allow the price of imports to rise in tandem.
A drive to lower pollution from burning coal won't necessarily result in less of the fuel being consumed. It may instead result in better quality coal being used, and more of it, especially if the more modern generators start using scrubbers rather than leaving the air-cleaning units turned off.
Demand outside China also looks like it is improving, with India, Japan and South Korea all importing more coal, given it is currently much cheaper than alternatives such as natural gas or oil for power generation.
However, the sheer volume of coal available on the seaborne market will likely exceed any demand gains, meaning that price rallies are unlikely to be sustained.
Even so, the shift of forward curves to mild contango indicates that prices may have bottomed out at the recent lows. (Editing by Tom Hogue)