22-02-2018

European thermal coal traders change strategy as Q2/Q4 contracts flip into contango

The front half of the CIF ARA thermal coal futures curve has shown a move into contango recently as low demand in the spot market has continued to pull the prompt contracts down, affecting trading strategy.

The spread between the Q2-18 contract and the Q4-18 contract first flipped from backwardation to contango earlier in the month and was in a contango of 30 cents Monday, having been backwardated $2.40 on the first day of trading in 2018.

Sources attributed the drop at the front of the curve to a slow start to the year in the spot market as most utilities have been covered through contracts despite periods of cold weather through January and early February.

Issues in the global equities market earlier in February also led to a bearish sentiment in the European thermal coal market.

“Lack of physical activity is probably slowing down the front month activity,” a Northwest Europe-based broker said.

A Northwest Europe-based producer-trader said the market has been hard to get involved in owing to tricky trading conditions, adding that this will continue in the short term.

“You have to pick your battles,” the trader said, adding that the change in the shape of the curve has altered his trading strategy.

FRONT OF CURVE FALLING, NEWCASTLE STILL FIRM

Since the start of the year, the prompt month contract has dropped to $85.25/mt, down $13.25, according to S&P Global Platts assessment Monday, compared with a $3 drop in the Cal-19 contract.

The Northwest Europe-based broker said traders were looking for a way to buy the front of the Richards Bay curve, and it seemed to be that tonnage was only available via implied spreads between Richards Bay futures and CIF ARA futures, leading to a selloff in the implied freight last week and a fall in the prompt quarter contracts.

Due to a move to contango at the front of the curve, the discount from the FOB Newcastle futures and the CIF ARA prompt month contract widened to minus $20, having been minus $5.70 on the first day of trading in 2018.

Source: Platts

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