Weak coal burn kept net EU thermal coal imports at historic lows in August and poor margins for generators are likely to have restricted receipts since then as well. Positive clean dark spreads for base-load generation during the peak winter months may support a modest recovery in coal burn and imports, but the potential for greater competition from gas remains a downside risk to European coal demand.

EU members imported a net total of 5.6mn t of coal from countries outside the region in August, which was flat with June and July and down from around 10mn t in the same month last year. Imports from the Netherlands fell by 1.3mn t on the year to 1.4mn t and led the overall decline, with Spanish and Italian receipts down by around 925,000t and 610,000t, respectively, at 255,000t and 425,000t.

Net January-August receipts of seaborne thermal coal in the EU were down by 13.8mn t on the year at just 59.4mn t, Eurostat data show. At the present rate, imports are on course to fall short of 89mn t in 2019, which would be down from around 115mn t last year. Annual imports have only fallen short of 100mn t once this century, when net receipts totalled 93mn t in 2000.

Northwest European countries and the Nordic states have together accounted for around 6.1mn t of the overall decline in January-August imports, with flows to Iberia down by 3.6mn t, receipts elsewhere in the Mediterranean region down by 2.3mn t and arrivals in central and eastern Europe down by 1.9mn t.

From the supply perspective, imports from the US and Colombia have dropped by 6.1mn t and 6mn t, respectively, to 5.3mn t and 7mn t, with Russian volumes down by only 3.3mn t at 34.3mn t. Arrivals from Indonesia — which go mostly to Spain — were down by 1.3mn t at 2.8mn t.

The volume of coal listed without an origin in the customs data has increased by 2.5mn t on the year, which may be exaggerating some of the apparent declines in imports from the EU’s key suppliers. Nearly all of the unknown-origin imports in 2019 are bituminous coal and have landed in the Netherlands, the data show.

The particularly steep decline in imports over the summer has coincided with negative clean dark spreads and intense competition from natural gas for thermal power generation. Month-ahead clean dark spreads sank to minus €1.65/MWh for August output and averaged minus €1.57/MWh for the whole of the April-September period. The expected return for running 55pc efficient gas-fired plants over the summer was around €7/MWh and so significantly more economical than burning coal.

Aggregate coal-fired power generation across Germany, Spain, the UK and France fell to 23.2TWh over those months, compared with 53.5TWh in summer 2018. The 30.3TWh drop in coal burn is the equivalent of around 11.4mn t of 5,700 kcal/kg coal burn in 40pc efficient plants. Coal-fired generation in Poland — historically the EU’s second-biggest consumer — was down by only 1.6pc on the year this summer at around 38TWh.

Clean dark spreads for base-load generation in October averaged minus €0.31/MWh last month and output during the first half of October was down by around 2TWh on the year, although the margin for November has averaged around €4.52/MWh so far this month, which may drive a recovery in output next month. But gas has still been around €2.60/MWh more profitable to burn than coal for base-load generation in November, which may still cut overall coal demand on the year next month despite any seasonal increase.

Forward coal prices are currently low enough to incentivise some switching back from gas to coal in the thermal fuel mix in January-February, but only by a narrow margin. The API 2 first-quarter coal swap was at generation-cost parity with gas on 25 October, with the January swap €0.19/MWh ($1.46/t) lower than the maximum threshold beyond which coal-fired generation becomes less profitable to run than gas. The first-quarter 2020 swap was €0.55/MWh lower than the same fuel-switch threshold at the start of the month meaning coal has seen its slender cost advantage shrink so far this month, and this time last year the API 2 first-quarter 2019 swap was €2.29/MWh below the level needed to incentivise fuel switching to gas.

Supply-side fundamentals in the gas market continue to pose a significant downside risk to coal’s slender cost advantage this winter. Gas stocks in northwest Europe are at a relatively high level compared with recent years, and the availability of LNG in the Atlantic remains comparatively firm following a further increase in global liquefaction capacity this year. But a recovery in seasonal heating demand compared with last year, lower gas production in the Netherlands and uncertainty surrounding pipeline imports from Russia all have the potential to counter the build-up of a winter gas surplus.

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