API 2 upside limited, but tight margins to slow losses
The new year-ahead API 2 calendar 2021 contract has begun the year on a firm note, although risks remain skewed to the downside as strong competition from natural gas along the forward curve continues to weigh on the European demand outlook.
The new year-ahead swap settled at $62.35/t in its first session of the year. This was down by $19.80/t compared with its predecessor at the start of 2019, although the swap has since gained 3pc in value and recorded six consecutive daily increases over 31 December-8 January.
API 2 calendar 2021 fell by nearly $6/t in December and looks to have found some technical support after plunging below its 50-day and 100-day simple moving averages at the end of last year. Rising oil prices amid heightened geopolitical tension in the Middle East also lent support to global energy commodities, including coal, early in 2020.
But the European coal market continues to face downside price risk as power sector demand is unlikely to recover while natural gas prices remain more competitive for base-load generation. Forward API 2 coal prices are currently at a level that will make it difficult for a 40pc-efficient coal plant to compete with 55pc-efficient gas-fired generation throughout most of the 2020-23 period (see chart).
Growth in open interest on API 2 calendar 2021 via the Ice has also slowed during the latest rebound, suggesting that counterparties may have been closing short positions to take profit rather than building long positions early this year. Calendar 2021 fell by $6.60/t to as low as $62.15/t over 26 November-30 December, with open interest rising by around 3.9mn t to 16mn t across the month. But open interest slipped to 15.7mn t by 8 January following the recent price recovery.
Rising renewable capacity and strong competition from natural gas amid high stocks and firm LNG supply means European power sector coal demand is unlikely to recover the ground it lost in 2019, but prices and consumption are also unlikely to fall as sharply as they did last year.
The scope for additional coal-to-gas fuel switching across some of the biggest European power markets is likely to be limited in 2020 after a significant proportion of coal was displaced by gas from March 2019. The biggest year-on-year declines will come early in the year, as aggregate coal-fired generation of 12.5GW across Germany, Spain, the UK and France during the first quarter of last year will be heavily reduced in 2020 as a result of gas' current cost advantage for base-load generation.
Coal-fired generation across the four markets averaged 6.4GW in April-December 2019, down from 13.7GW in the same months of the previous year. But coal demand may stabilise in 2020 as flexible coal-fired generation was already largely displaced from the generation stack during the second half of 2019, meaning there is limited potential for further fuel switching this summer.
A more stable demand profile could steady API 2 coal prices in 2020, following a volatile year in 2019 that saw the year-ahead shed around a third of its value in January-December. The calendar 2020 swap began the year at $82.15/t and settled at $56.45/t on 31 December.
Coal price weakness is also likely to be limited by an adjustment in seaborne supply availability in the Atlantic, with US exports set to fall again in 2020. Strong seaborne coal prices through 2018 and early last year helped to sustain European imports early in 2019 as some US volumes were hedged forward, but the same is not true in 2020.
The EU imported a net 1.6mn t/month from the US in 2018 and nearly 1mn t/month in the first quarter of 2019, but the rate fell to 500,000 t/month in the seven succeeding months and is unlikely to recover at current price levels. Colombian supply to Europe has also slowed in the past year, falling to an average of 900,000 t/month in January-October 2019 from 1.7mn t/month in the same period of 2018.
Thermal coal imports to the EU fell to their lowest since 2000 last summer at around 5.4mn t/month and are likely to fall considerably short of the 9.3mn t/month average recorded in the first quarter of 2019. This may help to balance the likely drop in power sector consumption in the near term and thereby limit future downside price risk, compared with the drop seen in 2019.
Price support may also come from increasingly tight margins for producers in Russia — the EU's biggest supplier of seaborne coal. Argus' NAR 6,000 kcal/kg netback price to the Kuzbass production region from Murmansk ports was below $1/t at the end of 2019, compared with $26.16/t at the start. This means that costs to transport coal from Kuzbass mines to export ports are nearly as high as fob export prices available in the spot market, making exports to Europe increasingly challenging.
API 2 liquidity stable in 2019
API 2 swaps liquidity slipped by 2pc on the year in 2019 to 1.26bn t, according to data collated by Argus.
This was comparatively stable compared with 2018's 14pc annual decline and the 50pc reduction in trade to 1.49bn t in 2017.
Ice exchange trade accounted for a third of total API 2 liquidity, with 39pc of trade cleared through the same exchange and the remaining 28pc handled by the CME.
Of the 899mn t of exchange-executed and cleared trade handled by the Ice, 566mn t of liquidity was on calendar year delivery contracts, which was down from 734.3mn t in 2018. Forward hedging activity among utilities was likely depressed as the year-ahead API 2 swap was uncompetitive with gas for power generation throughout nearly all of the second half of the year.
But API 2 liquidity through the Ice grew on the year for monthly, quarterly and seasonal delivery periods, the bourse's data show. Some 260.6mn t of trade on quarters was done, compared with 207.2mn t in 2018, with 71.7mn t on the monthly swaps, up from 70.1mn t a year earlier. And 450,000t on seasonal swaps was traded, compared with just 30,000t in 2018.
Related news posts
USCG updates ongoing lower Mississippi restrictions
USCG updates ongoing lower Mississippi restrictions
Houston, 17 September (Argus) — The US Coast Guard (USCG) will further limit northbound movement for barges transiting the lower Mississippi River despite slightly higher water levels following Hurricane Francine's landfall late last week. The USCG announced on 16 September that all northbound traffic traveling from Tunica, Mississippi, to Tiptonville, Tennessee, can only have five barges wide and only four of those can be loaded. Barges also cannot be loaded deeper than 9.5ft. Any southbound traffic from Vicksburg, Mississippi, to Tunica cannot move more than seven barges wide or be drafted deeper than 10.5ft. Southbound traffic from Tiptonville to Tunica can only be six barges wide or less and cannot have a draft greater than 10ft. The USCG has updated lower Mississippi river draft restrictions about four times since the end of August, but this is the third year in a row of notable low water for the fall on the lower Mississippi river which has triggered draft restrictions to arrive more quickly than previous years. Hurricane Francine brought significant rainfall to the lower Mississippi at the end of last week . But this has not eased the minds of mariners, who anticipate the water may leave as quickly as it arrived. By Meghan Yoyotte Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
India’s energy transition hinges on power sector
India’s energy transition hinges on power sector
Mumbai, 17 September (Argus) — India's rapid economic growth has led to surging power demand, which the country aims to meet through expanded renewable energy capacity. But for now, coal remains firmly in its energy mix. Indian GDP grew by 6.7pc last year, according to energy watchdog the IEA, with emissions growing at a slightly faster 7pc, or about 190mn t, to 2.8 gigatonnes of CO2. Accelerating the transition to cleaner power generation is imperative for the country to meet its development and climate goals. But it is still heavily reliant on coal for energy security. India's coal-fired capacity stands at almost 218GW for the 2024 fiscal year, according to government think-tank Niti Aayog, accounting for a 49pc share of the country's total installed power mix. And it aims to add 80GW more coal-fired capacity by April 2031-March 2032. Coal-based power makes up 94pc of India's thermal power generation at present, and is likely to account for at least a 60pc share by 2030, reducing only slightly to 50pc by 2040, state-controlled producer Coal India business development director Debasish Nanda says. India's thermal power generation also includes natural gas, naphtha and diesel. India and more than 200 other countries reiterated a pledge to accelerate "efforts towards the phase-down of unabated coal power" at the UN Cop 28 climate summit in Dubai last year. To reduce its reliance on coal, the Indian government has outlined plans to become a gas-based economy. It aims to increase the share of gas in its energy mix to 15pc by 2030 from about 6pc in 2022. And it plans to expand its renewable energy capacity to 500GW by 2030 from 197GW now. Solar power currently makes up the highest share of this, with 43pc or 81GW, followed by wind power with 46GW. India is set to add a further 6GW of solar-based capacity and 1.2GW of wind-based power by March 2025, according to Niti Aayog. The power sector accounted for more than half of the increase in India's total emissions in 2023, the IEA says. Accelerating the transition is essential, but progress in individual states is highly uneven, according to a report by US-based think-tank the Institute of Energy Economics and Financial Analysis and UK think-tank Ember. States such as Karnataka and Gujarat have effectively integrated renewable energy into their power sectors, but others have not. India has many central and state-level policies to encourage energy independence, but implementation has not been adequate or transparent, the report says. Power move Firms are taking steps to boost renewable capacity. India's largest power producer, NTPC, primarily relies on coal but its 2032 plan to become a major diversified energy supplier includes renewable and nuclear power generation, chairman and managing director Gurdeep Singh says. It expects to have about 60GW of renewable energy capacity by 2032, and is looking to add 10GW of nuclear capacity, with an additional 4GW in a joint venture with a nuclear power corporation, Singh says. India also aims to electrify as much of its industrial sector as possible. State-controlled power transmission company Powergrid has set a target to meet 50pc of its internal energy needs through renewables by 2025 and achieve net zero emissions by 2047. Industry experts predict India's energy-related emissions are likely to increase up to 2028 and recede thereafter. But funding still poses a challenge, especially for a country so large. India earlier this year submitted to UN climate body the UNFCCC a call for developed countries to provide at least $1 trillion/yr in climate finance to developing countries from 2025, in reference to the so-called new collective quantified goal. The government says India alone requires $70bn-80bn/yr to fund its green energy goals. By Rituparna Ghosh and Prethika Nair CO2 emissions by sector, India, 2021 India power capacity sources Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
Hurricane Francine brings rain to the lower Miss. River
Hurricane Francine brings rain to the lower Miss. River
Houston, 13 September (Argus) — Hurricane Francine dropped 4-8 inches of rain around the lower Mississippi River, raising forecast water levels on the river and potentially improving shipping conditions for barges. Points between Cairo, Illinois, and Vicksburg, Mississippi, that were at their low water thresholds over the week are now forecast to exit those thresholds in the coming week according to the National Weather Service (NWS). Increased rainfall from Hurricane Francine has locations like Greenville, Mississippi and Helena, Arkansas entering regular water levels as soon as this weekend. Other locations, such as Memphis, Tennessee, will see a bump in water levels, but will remain at its low water threshold, said NWS. The US Coast Guard has not made any changes to the draft and towing restrictions since 10 September when they changed the point for heavier loading from Greenville, Mississippi, to Vicksburg for southbound limits. More water is likely to enter the lower Mississippi River through its tributaries in the coming days, after Francine has passed the Mississippi Delta. The storm made landfall as a hurricane on the Louisiana coast the evening of 11 September but downgraded to a tropical storm as it moved northward. By Meghan Yoyotte Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
Colombia advances moves to end coal production
Colombia advances moves to end coal production
Bogota, 13 September (Argus) — The Colombian government has identified areas in thermal coal rich parts of the Cesar and La Guajira provinces as special mining districts where coal production may eventually be replaced with operations meant to aid the transition to cleaner energy sources, deputy minister of mines Johana Rocha said on 12 September. The country has selected five areas in Cesar and three areas in La Guajira to be subject to Colombian president Gustavo Petro's decree issued on 2 August to create 16 special mining districts for diversifying production. The districts that have been selected include areas where Drummond, Cerrejon and CNR have coal mining operations and where Glencore subsidiary Prodeco used to mine. Anticipating the downturn in international coal demand, the Petro administration is looking at how to convert mining areas to other uses. Cesar and La Guajira also have the ability to be used for producing renewable energy, tourism and production of other minerals in high need such as silicon and agriculture, Rocha said. The Ministry of Mines will soon declare some of the areas as strategic mining areas that will be auctioned before the end of Petro's term in August 2026, Rocha said. The areas contain high grades of ferro silicon and polysilicon needed for production of solar panels and microchips. The ministry has held 20 separate meetings with local people in Cesar province. But Colombia will not convert the special mining districts until existing lease agreements with producers expire, Rocha said. "We want these coal licenses to continue operating under the contractual terms that they have. In the meantime, we will look at how we can supplement other income for those territories that have a high dependence on coal," Rocha said. Colombia's policy also could change under future presidential administrations. Drummond's El Descanso coal concessions expire in 2032. The company's La Loma lease ends in 2039. Drummond Colombia president Jose Miguel Linares told Argus two weeks ago that the company is interested in extending the El Descanso coal project for an additional 30 years. The company's three mines in Colombia have measured coal reserves that exceed 2bn metric tonnes. On the other hand, Glencore has laid out plans to progressively close Cerrejon by the time current mining concessions expire in 2034. Colombia's coal production could end by 2040 under a scenario of a gradual energy transition, Alvaro Pardo, the director of the Colombian mining agency, ANM recently said. By Diana Delgado Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
Business intelligence reports
Get concise, trustworthy and unbiased analysis of the latest trends and developments in oil and energy markets. These reports are specially created for decision makers who don’t have time to track markets day-by-day, minute-by-minute.
Learn more