The legendary fourth-quarter coal price rally is back with a vengeance. Most coal markets saw exceptionally bullish, almost Bitcoin-like, price rallies last week.
It seems one can’t blame it on the British either, for firing up some of their old coal plants again to stabilise their power grid after weak wind and solar supply.
Unfortunately for coal producers, just as was the case last year, this rally appears to be driven by spread trading, and good old fashioned holding back of physical supply.
Of course we may not have seen the price peak yet, but it is interesting that last year this time the rand was trading at around 14.65 to the dollar, versus 15.25 today, and we are trading lower in rand terms than we were last year.
To borrow some Bitcoin terminology again, the “pump and dumpers” are clearly not working hard enough. One never knows where prices may goof course, but we suspect we may see price come down rapidly again as the high-priced bids and spreads unwind,and export cargoes come flooding back into the market, causing miners to abandon chasing after what was a higher-paying Eskom. Ah, how fickle love can be.
In some actual fundamental news, the Newcastle vessel queue has hit record levels for 2020, at around 26 vessels, although Australian coal is still underperforming versus RB1, with Chinese buyers now sourcing their higher CV coal from as far afield as Russia, Colombia and South Africa.
A significant rally in spot prices reminds us of the fun and games experienced this time last year. The pattern appears to be to push up RB1 spot prices whilst at the same time significantly widening the spread between RB1 and RB3.
“You see my dear Indian coal customers, RB3 prices are not that bad compared to RB1.
”While spread traders enjoy their current grip on the market, it does give more vanilla coal producers a great opportunity to lock in forward prices, even if the curve is not as attractive as it might have been three months ago.
"Nevertheless, the back end of the curve might pick up as the spot market settles down and traders roll positions further out. The sudden price spike has of course caused momentum to shoot into record overbought territory, looking more akin to a Bitcoin momentum graph, instead of boring old coal.
"Of course, it’s quite likely that price could remain bullish, with momentum slipping back down on sideways price movement from here. Perhaps like Bitcoin, coal producers should learn to hold, but of course coal needs to keep moving and be sold. Expect some profit taking and pushing through of as many spot cargoes as possible whilst the going is good."