LONDON: South African physical prompt coal prices dropped by $1 to $3 a tonne on Thursday, pulled lower by heavy selling in the swaps market, while buyers stayed on the sidelines.
South African bids fell by around $3 to $82-$83 a tonne FOB, a level close to the two-year low of $81.13 reached in mid-June.
"A support level is going to be found soon. We're close to it now and I don't think there's much room to fall," one European trader said.
API4 coal swaps sold heavily throughout the day, in line with weaker power prices and helped pull physical prices lower.
Indian buyers, who had bought fairly heavily when South African spot prices were close to two-year lows in June, largely retreated when prices nudged $90 last week, and their withdrawal has trimmed a few dollars from prices, trader said.
The outlook for global demand, however, was seen as fairly robust because the coal burn in Europe has been exceptionally strong in the traditionally weak summer months, while India and China had been steadily importing.
Coal prices would have to rise by $50 a tonne delivered into Europe - in other words to rebound to $145 from current levels - to make gas-fired power plants as profitable as coal-fired generation, Reuters data shows..
"The analysis strongly suggests that coal should be the favoured source of fuel for generation for next winter," the UK's gas transmission operator National Grid said in its latest winter outlook report. "For gas to become the preferred source of fuel for power generation next winter, the gas price needs to fall by about 20 pence a therm or there needs to be a further increase in the coal price of about $50/tonne," it said.
Projected strong consumption will help support prices if the supply cuts already being put into effect become deep enough to make a difference to the surplus, traders and utilities said.
But even assuming more cuts are made, most analysts have revised down their price forecasts for 2012, and research notes are taking an increasingly bearish line on commodities across the spectrum.
"The next move in commodity prices is likely to be again driven by developments in global growth," Credit Suisse said in its latest Commodities Forecast.
"Our (coal) base case scenario is for prices to remain subdued through this year as obstacles to near-term production cuts push back chances of rebalancing supply and demand," the forecast said.
TRADES
A September delivery DES ARA cargo traded at $86.50 a tonne, down over $1.00 from Wednesday's bid level.
PRICES
An August loading South African cargo was bid at $82.75 and offered at $84.50, down around $1.50 from Wednesday's last trade.
A September loading South African cargo was bid at $82.00 and offered at $85.00, down around $3.00 from the previous day's bid. An August delivery DES ARA cargo was bid at $86.00 and offered at $86.50, down $1.00 on the offer.
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