* Coal over $160 needed to make gas attractive - Deutsche
* Deutsche Bank recommends long coal, short gas trading
By Henning Gloystein
LONDON, Jan 8 A steady decline in European coal
prices that has coincided with a tight gas market means that
coal prices would have to rise by almost $80 per tonne in order
to restore competitiveness to gas for power generation, Deutsche
Bank said on Tuesday.
Healthy coal export levels from producers such as Colombia,
South Africa and the United States have led to an oversupplied
coal market and helped pull prices down.
"In terms of comparative value to a power generator, natural
gas is currently trading at a level which is so expensive
relative to coal that coal prices would have to rise to $163 per
tonne in Europe and $169 per tonne in the UK in order to restore
competitiveness to natural gas for baseload power generation,"
Deutsche Bank said in a research note.
API2 2014 coal futures contracts have been in a downward
cycle since summer 2011 and have dropped almost 30 percent since
then to around $100 per tonne.
At the same time, European gas markets are tight as buyers
have to compete with Asian utilities for imports of liquefied
natural gas (LNG) and pipeline supplies from Russia and Norway
are also tight.
This means that the required rise in coal prices to restore
competitiveness of cleaner gas-fired power generation has
increased from $50 per tonne in summer last year to over $80 at
the beginning of 2013.
"Natural gas would not be competitive against coal unless it
falls to an average of 41.7 pence per therm (17.5 euros/MWh) in
Europe and 44.8p/th in the UK," the bank added.
European spot coal import prices are currently trading
around $85 per tonne, and benchmark British spot gas prices are
trading around 66 pence ($1.10) per therm (p/th).
This poses problems to the European Union's energy policy
which wants to see a shift from coal-fired power generation
towards gas, which sends fewer emissions into the atmosphere
than electricity generated from coal.
Earlier in the week, the bank cut its ratings for several
leading European utilities, saying that "the worst is yet to
come for the sector" following an already bad 2012.
The bank also said that current gas prices were far too high
to create an incentive to invest into new gas-fired power
generation, a move policy makers desire in order to move away
from coal-fired capacity to meet European and national emissions
"Natural gas is trading well above the incentive cost of 42
p/th for a new associated gas project. In contrast, thermal coal
has just recently risen just above the level required for
producers to break even on cash costs, which is in the range of
$89-93 per tonne," the bank said.
Because of this big price disparity, Deutsche said it
recommended a long thermal coal and short UK natural gas trading
"Although our price forecasts do not suggest that either one
of the legs of this trade are justifiable on their own, we
believe that the relative value between thermal coal and
European natural gas favours the proposed trade both in terms of
the comparative value received by a utility for power
generation, and also in terms of the cost of production for the
In terms of supplies, Deutsche said that it expected
disruption risks to be relatively low as "Russian export routes
to Europe are expanding through Nord Stream and South Stream
(gas pipelines) while Norwegian production is focusing
increasing flexibility upon spot markets, and Europe has become
relatively less dependent upon LNG relative to 2011."