European thermal coal pricing has been even more dreadful than in Asia, with landed Europe and FOB Richards Bay sliding sharply. There are signs that supply is being cut to help bring a better balance to Atlantic markets. But there is still not enough demand tension to drive prices higher. This will likely come from stronger Chinese markets, which looks likely given stocks are now low.
Supply from key Atlantic based producers is down quite a bit in the year to date. The start of the year was heavily impacted by disruptions in Colombia, with the Drummond force majeure likely to impact shipments further.
In recent months though there has been a much more noticeable pull back in US exports, with finally appears that weak pricing is finally starting to restrain export supply. A better domestic market balance also appears to be limiting stockpile sales, which are unrestricted by cost curves. Stock ratios to consumption look much better than this time last year.
Most of the pull back in supply has been marginal supply that was heading to Asia this time last year. This is particularly the case from the US and Colombia. That arbitrage has been well and truly shut for sometime, but its encouraging that overstocked producers haven't had to liquidate inventory into this part of the market.
While this is helpful for markets as a whole, it still looks like the Atlantic is oversupplied. Shipments are up a little in the year to date and have been stronger in the last few months as Colombian producers make up for lost tonnages earlier in the year.
But while there is more coal going to Atlantic buyers this year, it doesn't look buyers need it. The UK looks roughly flat after big gains last year, with Germany also looking relatively stable. But Spain, for example looks oversupplied, with emerging demand from South America unable to offset the difference.
But the magnitude of this oversupply wouldn't be a problem if pricing elsewhere started to pick up. And I think this is likely in Q4, as it looks like the balance within China is now much more favourable, with low prices destroying supply and demand proving to be a little better.
So while the contango in futures curves for API#2 and API#4 are fairly steep coming into Q4 and 1Q14, I think its worth being long.
