Today an excellent guest post by Mr. Simon Jacques a commodity trade and shipping expert from Canada, partially inspired by our post on coal becoming an increasingly important energy source for “green” Germany.
As reported in “Coal conquering German energy market”, despite Germany’s effort to invest in green technologies, coal became a basis for satisfying Germany’s energy needs, unexpectedly taking over nuclear energy. One of the reasons for such development is a cheap price of American coal on the global markets, and a capacity of coal/green energy mix supply to react fast to changes in demand for energy on the German market.
The EU doesn’t like coal energy but apparently European traders are pragmatic and see value in the coal piles. Traders from the European utilities sector are increasingly interested into moving “not sexy coal” from U.S to Europe.
RWE Supply & Trading, the trading arm of RWE, Germany’s second-largest utility recently began trading physical and financial coal in New York.
Trafigura, the Amsterdam-based trading firm, said they were investing in a Louisiana coal terminal because they believe ”U.S. coal terminals are maxed out, and there is excess demand to be served.”
Is a T/A1 coal arb open between U.S and Europe?
Coal is a very difficult market to analyze on a fundamental basis. On 2014/04/17, steam coal at Hampton Roads was assessed by PLATTS at $82.25/mt (on a 6,500 NAR2 and < 1% S02 basis). On basis used in ARA, (6000 NAR, <1% S), it’s a $75.92/MT equivalent. In April, after a sell-off in the freight market, spot rates for a coal voyage delivery HAMPTON ROADS ARA REDEL HAMPTON ROADS were below $7.50/MT.
Dry-Bulk Freight sell-off
The total implies $83.42/MT for U.S STEM COAL CNF3 ARA. Meanwhile, Argus/McCloskey ARA stem coal contract (6,000 NAR 1% sulfur) was traded at $77/MT and physical trades were assessed around $84/MT. Despite depressed freight rates, coal markets in the Atlantic basin appear fairly priced and the arbitrage window for U.S coal in ARA appeared closed.
However on the U.S Central Appalachia market (or what traders also called CAPP), CSX coal Big Sandy/Kanawha (12,500 Btu/lb. 1% sulfur Index) was at $60.58/ST or $66.77/MT. On a 6,000 kcal/kg NAR 1% sulfur basis, this is $57.68/MT. The T/A arb based on the ARA-CSX spread now appears greater than rail cost $18/MT and ocean freight rates $7.50/MT combined.
In conclusion, ocean freight and coal prices between ARA and Hamptons Roads appeared fairly priced and the T/A arbitrage was not explicitly evidenced in freight and spreads.
However, a T/A arb of $.82/MT (on a 74,000 MT voyage is $60,680) seems to be priced between CAPP and ARA. Coal traders’ arb profit doesn’t hinge in ocean freight rates but more in rail and blending optimization. All other factors being held constant, this arbitrage is likely to favor an increase in ARA stocks and to depress ARA steam coal curve.
1. T/A, abbreviation for trans-Atlantic
2. NAR (Net as-received basis) – A basis determining the amount of energy a coal contains and is the as-received energy minus the amount of energy required to vaporize the moisture in the coal, in Kcal/KG. In Coal trading, NAR are essential to quoting and to calculate blending optimization.
3. CNF - Cost and Freight
4. The Trade, Shipping and Finance Wizard, Navigate the commodities markets with Freight and Spreads, jacquessimon506.wordpress.com