By Dinakar Sethuraman and Alistair Holloway – Jun 24, 2010
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A 30 percent rally in the price of coal delivered to Europe since the end of March is increasing the potential for South African mining companies to send more cargoes to the region and fewer to customers in China and India.

Coal before shipment costs from South Africa’s Richards Bay traded at $93.62 a metric ton last week, while Northwest European coal was at $95.88, a premium of $2.26, IHS McCloskey data show. Two months ago, there was a discount of $11.75 as Asian demand drove South African prices to a 17-month high, the data show. The premium will probably have to go even higher before shipments to Europe accelerate, Barclays Capital said.

“You would need to go around $10, or above,” to get more sustainable flows of spot cargoes from South Africa to Europe, said Amrita Sen, a London-based analyst at Barclays. At those sorts of premiums “it makes sense for South Africa to swing into Europe more,” she said.

European coal is rebounding from a slump of as much as 16 percent earlier this year amid a jump in prices for natural gas, which competes with the solid fuel to generate power. European industrial orders increased for a third month in April, the European Union’s statistics office said yesterday. Industrial production in Germany, Europe’s biggest economy, rose in April by more than economists had forecast in a Bloomberg survey.

Implied Freight

While the European price includes a freight component, the South African one does not. The price difference, known as implied freight, is used by some traders to gauge trends and to bet on or hedge against future prices in Europe.

When implied freight turned negative, it was a sign that Europe didn’t need coal and the fuel was shipped to Asia, Stefan Judisch, head of RWE AG’s supply and trading unit, said at a conference in Kuala Lumpur on June 8. RWE, based in Essen, is Germany’s second-biggest utility, after E.ON AG.

Profit from running coal-fired power plants for next year, or the so-called clean-dark spread, is about 5.93 euros ($7.29) a megawatt-hour, more than double the margin from burning natural gas, Bloomberg data showed. The calculation is based on German electricity prices, Dutch gas rates and emissions costs.

U.K. natural gas futures for July traded on the ICE Futures Europe exchange rallied 32 percent this year to 42.60 pence a therm as of 2 p.m. in London yesterday.

South Africa cut coal shipments to the Atlantic region by 40 percent in the first five months of this year and boosted shipments by 63 percent to Asia, according to data from mjunction Services Ltd., a web-based trader backed by India’s biggest steel producers.

India and China accounted for 42 percent of Richards Bay’s shipments in the first quarter of 2010 compared with 25 percent a year earlier, according to data from the coal terminal. The facility is owned by South Africa’s largest exporters of the fuel, including BHP Billiton Ltd., Anglo American Plc and Xstrata Plc.

To contact the reporters on this story: Dinakar Sethuraman in Bangalore at dinakar@bloomberg.net. Alistair Holloway in London at aholloway1@bloomberg.net.

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