LONDON, March 6 (Reuters) - European utilities and traders said this week they have been buying prompt coal to store and use later in the year to benefit from the $12 premium of forward over prompt prices, something unseen in the market for over two years.
Although the contango between the front month and fourth quarter is not as wide as it was two years ago, and the cost of storing and managing coal so it does not degrade or catch fire eats into profits, there is potential money to be made.
“We would expect opportunistic demand for the purpose of storage in order to deliver at a later date to be more attractive if it (the contango) were to widen above the $20 levels seen in early 2010,” Barclays Capital said in a research note on Tuesday.
Part of the motivation to stockpile is that numerous players, producers as well as banks, traders and consumers, have come through the winter with massive stocks and more unwanted, previously-bought coal is still arriving.
Last winter was the warmest for 30 years in Europe and the February freezing weather was not prolonged enough to eat much into stockpiles.
“The contango is mitigating the overstocking which people were suffering from anyway - it’s not the first choice for anybody,” one utility source said.
Players long physical coal have few options - to dump it and sell at whatever the market price is, currently 20 percent lower than in October - or keep it for use or resale later.
Certain coal origins such as Indonesian or Colombian have more of a tendency to spontaneously combust when stored long-term and any coal has to be compacted and stockpiles managed to avoid degradation from exposure to the elements.
Coal is trickier to stock for many months than commodities such as oil or metals in warehouses but it can be done.
DES ARA front-month prices have dropped to $95/T from $120 in October due to oversupply and tepid demand in Europe, while Q4 DES ARA values are around $107/T.
“You’d be surprised which companies, how many of them are buying now to stockpile,” one industry source said.
“Utilities, traders, banks - many have leased space at ARA terminals,” he added.
Stockpile space at Europe’s main import hub for coal of Amsterdam-Rotterdam-Antwerp (ARA) has been uncomfortably high through the winter and little space is available now, which limits firms’ ability to play the contango.
ARA terminals can store over 10 million tonnes of coal.
The cost of storage, discharge from ship to barge, barge to stockpile and re-loading from stock plus surcharges and other expenses need to be factored in, Barclays said.
These would add up to over $20 a tonne, according to Barclays.
“That said, market participants with much cheaper storage and handling costs are likely to have already started arbitraging this gap,” the research note said. (Reporting by Jacqueline Cowhig; Editing by Anthony Barker)