Is a T/A arbitrage open for U.S coal ?
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Hello Gcaptain, let’s discuss about a topic extremely relevant in the context of the shipping industry: U.S Coal.
[/SUP]Coal is not popular because of its environmental impacts but in Germany for example, coal becomes a basis for satisfying energy needs despite efforts to invest in green power.
Why ?
Because:
- Coal is “dirty” cheap $2.5/mmtbtu equivalent, Gas in Europe is priced above $12/mmtbtu.
- Coal can react fast to changes in energy demand.
- Coal is unexpectly conquering the German Energy market after the decision to close nuclear power plants.
Value in the coal pile
The European Commission doesn’t like coal energy but apparently European traders more 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.”
Are these developements good for U.S Jones Act Barge industry, I think yes.
Is a T/A[SUP]1[/SUP][SIZE=5] coal arb open between U.S and Europe?
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Coal International Market is a very difficult market to analyze on a fundamental basis.
If a T/A arb is possible betweeen U.S and Europe, then it is good for U.S Coal and Shipping.
On 2014/04/17, steam coal at Hampton Roads was assessed by PLATTS at $82.25/mt (on a 6,500 NAR[SUP]2[/SUP] 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 T/A voyage HAMPTON ROADS-ARA REDEL HAMPTON ROADS were below $7.50/MT[SUP]*[/SUP].
Dry-Bulk Freight sell-off
The total implies $83.42/MT for U.S STEM COAL CNF[SUP]3[/SUP] in 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/MT ($52.34/MT on a 6,000 kcal/kg NAR 1% sulfur basis).
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 $6/MT (on a 74,000 MT voyage is $450,000) seems to be priced between CAPP and ARA.
In Trading terms, for 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.
[RIGHT]Simon Jacques[SUP]4
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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 (Kcal/KG).
In Coal trading, NAR are essential for quoting and for blending optimization.
*. Based on 3 running day SHINC load and 15000 L/T SHEX discharge, IFO $580/MT, MDO $850/MT, 14KTS on 30MT IFO+2MT MDO.
3. CNF - Cost and Freight -
The Trade, Shipping and Finance Wizard, Navigate the commodities markets with Freight and Spreads, jacquessimon506.wordpress.com