* European utilities turn to cheap coal to generate power * Export glut has depressed coal prices whilst gas remainstight By Henning Gloystein and Jonathan Saul LONDON, Jan 10 (Reuters) - Rising coal use in Europe isexpected to boost demand for imported hard coal and could helplift seaborne freight rates, giving welcome support to a marketthat has been dogged by the global economic downturn and a shipglut. Healthy coal supplies from exporters such as South Africa,Russia and the United States have led to a sharp drop in prices,boosting coal demand in Europe over the past year, despite asluggish economy. Analysts say prospects for firmer coal demand will lendsupport to the dry bulk freight market, which has faced one ofits worst ever downturns - hit especially by a surplus ofvessels ordered when times were good. "Coal demand is forecast to remain robust through 2013. InEurope, coal prices are expected to remain competitive againstnatural gas, supporting our forecast for continued importgrowth," said consultants Maritime Strategies International. In Germany, Europe's biggest economy and power electricityuser, hard coal use was up 0.6 percent last year, while demandfor natural gas, coal's main competing fuel for powergeneration, was down 2.3 percent. Shipping analysts expect the positive import environment toprovide support for panamax vessels, which usually transport60,000 to 70,000 tonne cargoes of coal or grains. Peter Norfolk, research director with broker FreightInvestor Services, said coal exports from the United States toEurope had provided some support for panamaxes last year. "The U.S. will still be an important source and you willstill get a lot from Russia later in the year," he said,referring to winter weather restrictions in Russia. In the United States, the shale gas revolution has led to acollapse of domestic natural gas prices and forced American coalminers to look overseas for coal buyers. Russian coal exports increased by around a fifth last yearto 125.7 million tonnes despite weak world prices, according tothe Russian Energy Ministry. Adding to these healthy supplies, South African coal minersexported 68.3 million tonnes of coal in 2012, up from 65.5million tonnes the previous year. CHEAP COAL BOOSTS DEMAND Because of the oversupply in the coal market, API2 2014 coalfutures contracts have been in a downward cycle since summer2011 and have dropped almost 30 percent since then to around$100 per tonne. Analysts say that although a bleak economic outlook for 2013would hamper demand, the low coal prices will lead to furtherincreases in demand in Europe and Asia. "The strong supply side has stimulated demand. We expectEuropean takes to be up by some 15 million tonnes, Indianimports to rise 18 million tonnes and Chinese imports toincrease by an impressive 40 million tonnes year-on-year,"British bank Barclays said in a research note in lateDecember. At the same time as coal is cheap, European gas markets aretight as buyers have to compete with Asian utilities for importsof liquefied natural gas (LNG) and pipeline supplies from Russiaand Norway are also tight. As a result, coal is much more profitable for electricitygeneration in Europe than gas. German forward power generation is currently around 20 euros($26.09) per megawatt-hour (MWh) more profitable than gas, andin Britain the premium is almost 18 pounds ($28.82) per MWh,according to Reuters data. Analysts say that utilities will take advantage of thisspread and buy more coal for use in power stations, boostingdemand for the commodity, whilst reducing gas use. Deutsche Bank said this week that it recommendeda long thermal coal and short UK natural gas trading position. "Although our price forecasts do not suggest that either oneof the legs of this trade are justifiable on their own, webelieve that the relative value between thermal coal andEuropean natural gas favours the proposed trade both in terms ofthe comparative value received by a utility for powergeneration, and also in terms of the cost of production for thetwo fuels," the bank said in a research note. WEAK COAL OUTLOOK AFTER 2013 Despite this potential support for coal and freight markets,analysts say that the longer-term outlook remains bearish as anoversupply of coal will clash with falling demand. "We expect reductions in imports to come from Europe (asenvironmental legislation results in the closure of some oldercoal plant and economic growth remains stagnant) and, moreimportantly, China, as investments in alleviating domestictransportation constraints will come to fruition in 2014,"Barclays said. "We expect the latter to allow a reduction in Chinese coalimports of some 35 million tonnes in 2014." Freight Investor Services' Norfolk said separately: "Thereis still a huge volume of panamax ships, not quite as many aslast year, on order for delivery in 2013 and that is going to bethe stumbling block for freight."
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