European Gas is Not Cost-Competitive with Coal
Coal Has to Increase $80 Per Ton
Deutsche Bank believes that falling coal prices and a tight gas market mean Europe would have to see coal prices go up by nearly $80 per ton in order for gas to regain enough competitiveness. Part of this coal abundance lies in exports from Colombia, the U.S., and South Africa.
"In terms of comparative value to a power generator, natural gas is currently trading at a level which is so expensive relative to coal that coal prices would have to rise to $163 per tonne in Europe and $169 per tonne in the UK in order to restore competitiveness to natural gas for baseload power generation," Deutsche Bank said in a research note.
Since 2011’s summer, API2 2014 coal futures have been falling, having lost almost 30 percent to reach $100 per ton. Meanwhile, increased Asian demand for liquefied natural gas and straitened pipeline supplies from Russia and Norway means that the European gas market is a far cry from its U.S. counterpart.
Coal prices now have to go up by $80 per ton, up from last summer’s figure of $50, in order for gas-fueled power generation to become more viable.
European spot coal import prices presently hover around $85 per ton, and the benchmark British spot gas prices are about $1.10 per therm. The situation certainly is a problem for the EU’s stated goal of moving away from coal-fired energy infrastructures.
The high current gas prices also discourage further investment. Deutsche recommends long positions on thermal coal and shorts on UK natural gas.
In closing, as Reuters reports:
"Although our price forecasts do not suggest that either one of the legs of this trade are justifiable on their own, we believe that the relative value between thermal coal and European natural gas favours the proposed trade both in terms of the comparative value received by a utility for power generation, and also in terms of the cost of production for the two fuels."