EU thermal coal imports at a landmark low

Net thermal coal imports to the EU slumped to another historic low in May, with shipments from key suppliers the US and Russia both falling to their lowest in over a year.

EU members imported a net total of 6.6mn t from countries outside of the bloc in May, provisional Eurostat data show, down from 6.8mn t in April and 7.9mn t in the same month last year. This was the lowest net monthly intake of coal to the 28 members that currently make up the EU since August 2002, when 6.1mn t was received.

The drop in imports comes amid a steep decline in coal-fired power generation across northwest Europe, with aggregate output in Germany, Spain, the UK and France repeatedly slipping to historic lows this summer.

France, Italy and Poland — which together accounted for 1.1mn t of the 1.3mn t aggregate year-on-year fall in net imports — were the major drivers of the overall decline, with the UK and Germany accounting for a further 325,000t of the drop in imports. Spain was the key market bucking the downward trend in May, with imports 263,000t higher than in 2018 at 708,000t.

The Netherlands — Europe's main transshipment hub for coal — received 2.1mn t in May, which was flat on the year and meant that year-to-date receipts remained slightly higher than in 2018, despite the steep drop in coal burn in the region this year. Thermal coal imports via the Netherlands rose to 13.9mn t in January-May 2019, up from 13.2mn t last year, with demand likely boosted by expectations of higher coal burn than was realised in the first quarter of the year and a greater need among utilities to restock coal plants in southern Germany following transportation bottlenecks through the second half of 2018.

The contango on the forward curve for much of 2019 has also created a strong incentive to store coal to capture value between weak spot prices and higher-priced forward contracts, which may also have supported deliveries to some northwest European countries this year. German imports in January-May were also higher on the year, with nearly 600,000t more coal imported than in 2018 at a total of 5.1mn t.

But total net imports to the EU in January-May fell to a 19-year low of 41.2mn t, which was down from 44.5mn t in 2018 as a result of strong declines to Italy, France, Ireland and the UK. Italy took 1.4mn t less coal than in 2018 during January-May, with France importing 930,000t less, and Ireland and the UK each taking around 800,000t less.

The EU's key coal suppliers — Russia, Colombia and the US — all contributed to the year-on-year drop in May receipts. US volumes fell by 652,000t on the year to a nine-year low of 513,000t in May and imports from Colombia were down by 540,000t on the year at 821,000t.

EU imports of Russian coal had been relatively robust in January-April, but shipments fell by 300,000t on the year in May to a 25-month low of just shy of 4mn t, a strong signal of weak Atlantic coal fundamentals driven by low coal burn and high stocks across Europe.

The implied delivered cost of shipping Russian coal to Rotterdam held a premium of around $4/t to Argus' cif Amsterdam-Rotterdam-Antwerp (ARA) daily index in March-April — up from an average premium of around $1.90/t in the prior 12 months — which may have curbed shipments arriving in Europe in May. The premium slipped back to $2.69/t in May and customs data show an increase in Russian exports to EU members that month, although the spread widened again to $4.68/t last month as cif ARA prices dropped to an average of $48.90/t. This created an increasingly challenging environment for producers looking to sell volumes into Europe.

Since touching a three-year low of $47.28/t on 19 June, the Argus cif ARA assessment has recovered more than 25pc of its value. With clean dark spreads for the remainder of the third quarter still under pressure and gas prices low enough to make even lower-efficiency gas-fired plants competitive with coal, the latest recovery in cif ARA prices is unlikely to have been driven by demand-side fundamentals and may instead have been spurred by sellers stepping back from the market.

Recent gains reduced the spread between the implied delivered cost of US Illinois basin coal and Russian coal to the cif ARA market to $2.30/t and $3.93/t, respectively, on 12 July, down from as high as $4.88/t and $5.52/t at the end of June.

But the increase in cif ARA prices has also boosted the relative profitability of Colombian coal against competing origins, which could give some suppliers of Colombian material a chance to fix cargoes into Europe. The delivered cost of lifting Colombian coal from Puerto Bolivar and shipping to Rotterdam stood at $60.24/t on 12 July, which was just $1.22/t higher than Argus' weekly cif ARA assessment.

Despite recent improvements in the economics for coal deliveries to Europe, the near-term demand outlook remains weak and stocks full, meaning there is little chance of a major recovery in import demand this summer. Argus' cif ARA coal assessment on 15 July was around $30/t too high to allow 40pc-efficient coal-fired plants to compete with 55pc-efficient gas-fired plants for day-ahead base-load generation, Argus calculates. And fourth-quarter API 2 swaps are around $1.10/t higher than the equivalent coal-to-gas fuel switching threshold, meaning gas may continue to displace some coal from the fuel mix early this winter.

Net EU thermal coal imports (Jan-May) mn t

Coal burn - De, Es, Fr, UK TWh

Net EU thermal coal imports by origin mn t