Coal prices may have much higher to go this year on Germany's nuclear rethink and the Japan crisis, despite having dipped after the first shock reactions across energy markets.
Analysts polled by Reuters already predicted steady gains this year, but a pullback due to a seasonal demand dip and a surge of liquefied gas (LNG) exports to Europe is likely to only prefigure sharper gains than expected later.
Coal accounts for 40 percent of world electricity generation, according to the International Energy Agency, and will bear much of the burden of any loss of nuclear's 14 percent stake.
Coal prices have seen sharp intra-day spikes since December in response to floods in Australia, Japan's disaster and Germany's decision to shut 7 megawatts of nuclear power, pushing Australian prices close to $135 a tonne (metric ton) and DES ARA Europe prices to around $130.
But after each rise, they have returned to around $125 a tonne. A Reuters poll in February predicted average 2011 European ARA prices of $121.
Even so, traders, utilities and producers advise against shorting the price of coal. They say there are too many variables — from the speed of Japan's rebuilding, Australian exports' full recovery, moves in the dollar and oil price spikes on further Middle East unrest.
On Friday, Xstrata agreed term contract prices with Japan's Chugoku at around $130 a tonne for 2011, a record level that surprised the market — traders had expected a price $10 or so lower. That tipped market sentiment into cautious bullishness.
Privately, many producers, traders and analysts have said that a rise to $130-$140 per tonne now looks possible in the second half. And if China and India resume buying, a much steeper increase could materialize.
"The Japanese have clearly been convinced by the Australians that the market going up is a certainty," said Emmanuel Fages, analyst with Paris-based Societe Generale.
"In the UK you might well see demand going down but the German nuclear situation has given a new impulse to the coal market in Europe and I think you'll see that for the next 1-2 years at least," he said.
"In the near-term Newcastle prices could be bearish but not API2 - Germans will need more coal this year," said Amrita Sen, analyst with Barclays Capital.
Germany does not have an LNG import terminal and so cannot benefit from the large numbers of cargoes being shipped from Qatar in particular to Europe.
At the time of the February Reuters coal poll, the median forecast of $121 was based upon fairly stagnant demand in Europe.
Germany's move to shut nuclear plants was not factored into forecasts but could add anything from 3-11 million tonnes of coal demand this year.
The short-term bullish, medium-term bearish effect of the Japanese disaster has also not been fully factored into prices partly because Japan managed to reopen damaged ports to take in coal far quicker than expected.
July and August Australian coal cargo prices rose by around $2.00 on Friday partly in response to the Xstrata settlement but also on expectation of increased Japanese spot buying from July.
In Europe the dark spreads (the profit from generating with coal as a fuel) compared with spark spreads (gas generation) indicate that coal is more attractive an option through the summer — usually in Europe generators switch to cheaper gas.
There are more European utilities running coal trading books now than there were a few years ago and their offers do not necessarily mean the power plants have a surplus, a European trader cautioned.
"I'm not super-bearish, prices may soften as usual this time of year but for H2 I think it's all looking rather more positive," he said.
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