Strength in the Richards Bay 6,000 kcal/kg NAR physical and paper markets for thermal coal has apparently transferred to the Newcastle 6,000 kcal/kg NAR cargo and derivative markets which have also traded higher this week, market sources said Wednesday.

Screen-traded Newcastle thermal coal has rallied several dollars since trading at a recent low of $80.25/mt FOB, basis 6,000 kcal/kg NAR for December delivery on October 14, according to globalCOAL data.

In Asia trade Wednesday, a 25,000 mt parcel of December-loading Newcastle 6,000 kcal/kg NAR thermal coal was bid onscreen at $83.20/mt FOB to an offer at $84.50/mt, and two trades for this month and quality were concluded Tuesday at $84/mt FOB Newcastle on globalCOAL.

Market participants contacted by Platts expressed some surprise with the rise in Newcastle thermal coal prices.

"Quite a few physical parcels have been sold at $84/mt FOB Newcastle recently, and Richards Bay prices have been shooting up since the middle of September without any change to market fundamentals," said one trader.

Absent any colder weather, Japanese demand for Newcastle 6,000 kcal/kg NAR thermal coal has been consistently steady during October, he said.

"Japan has started restocking a little for the winter season, but the quantity is not much," said the market source.

Japan purchases around half of the thermal coal shipped from Newcastle's Port Waratah Coal Services' terminals, about 4.5 million mt each month, according to PWCS data.

A counter-point to this argument was that the recent October-year contract price settlement in Japan at $85.80/mt FOB Newcastle, basis 6,322 kcal/kg GAR, (roughly equivalent to 6,000 kcal/kg NAR) between Japanese utility Tohoku Electric and Australian coal producer Glencore had injected some support into Newcastle coal spot prices.

Another trader said bullish sentiment in the Richards Bay and European thermal coal markets was spilling over into the Newcastle thermal coal market and was pulling Australian FOB prices higher.

Index-linked trades were a reliable indicator of the balance of supply and demand in the market he said.

Newcastle 6,000 kcal/kg NAR thermal coal trades on this basis were going through at a discount of around $2/mt to FOB Newcastle index prices, and this was indicative of "an oversupply of physical tons," he said.

Some traders in the market linked the rally in FOB Newcastle 6,000 kcal/kg NAR spot prices to a surge in European delivered and Richards Bay prices in the past few weeks.

South African 6,000 kcal/kg NAR prices hit a five-month high Tuesday at $83/mt FOB for physical cargoes loading in the next 7-45 days, and CIF ARA European prices touched their highest point in seven months this week at $87.25/mt and went up $1.50/mt in Tuesday trade, according to Platts prices.

LARGE POSITION IN RICHARDS BAY PAPER MARKET: SOURCES

Traders alerted Platts to a large market position in the Richards Bay coal derivatives market, which they said had fueled an upturn in this market's prices in the nearby months of November and December, and led to a backwardated forward curve for the 2014 year.

This market position had been taken by an international trading firm that in the past week had purchased paper coal contracts equivalent to 3 million mt in the Richards Bay market, according to market sources.

Implied freight, that is, the difference or spread between 90-day delivery prices for physical cargoes delivered to the European trading hub of Amsterdam, Rotterdam and Antwerp and FOB Richards Bay prices had narrowed to only $1.65 Tuesday, as CIF ARA and Richards Bay FOB prices ended the day at $86.90/mt and $85.25/mt, respectively.

The actual cost of shipping South African thermal coal cargoes from Richards Bay to Northwest Europe was $12.95/mt for Capesize ships this week, and much higher than the implied freight value.

Some traders said the squeeze in the value of implied freight was a result of heavy selling of CIF ARA paper coal contracts and significant buying of Richards Bay paper market contracts by one trader.

In Tuesday's trading session, FOB Richards Bay 6,000 kcal/kg NAR paper market prices settled 85 cents-$1.10/mt higher for November and December at $85.05/mt and $87.10/mt, respectively.

But, Q1-2014 and Q2-2014 FOB Richards Bay paper market prices traded flat at $87.10/mt and 84.55/mt respectively, and for Q3-2014 they closed $1.20/mt lower at $83.35/mt, according to Platts forward curve data.

"Richards Bay derivatives trading is driving the thermal coal market," said one market participant.

The market participant went on to remark that it was "strange" that Newcastle thermal coal FOB prices had moved as high as they had this week, and the movement could not be fully explained by a reduction in seaborne freight costs, he said.