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ASIA THERMAL COAL: Newcastle spot prices jump as contract talks start in Japan

A rapid rise in screen-traded Newcastle thermal coal prices overnight to $80/mt FOB got the Asian market talking Thursday, with some participants drawing a link between the higher prices and the start of discussions in Japan for October 1 yearlong supply contracts for Australian thermal coal.

The price increase caught some Asian market participants by surprise, as they had not observed any significant changes in the Asian seaborne market that could drive Newcastle 6,300 kcal/kg gross-as-received basis prices higher, sources said.

Japan's only functioning nuclear reactor at the Ooi power plant went offline last weekend for maintenance, but market sources did not consider it significant for Japanese thermal coal demand.
"There are no power shortages in Japan, because power companies have switched to other generation types including new coal-fired plants," said one trader.

A second market participant said the quick rise in Newcastle spot prices was connected to a rally in European delivered market prices at the Rotterdam trading hub and in thermal coal derivative prices.

"It's all being driven by a rally in European prices," he said. "German power prices have been strong, which has led to buying of API2 [CIF ARA coal derivatives], as the dark spread has become more attractive."

The dark spread is the profit power companies derive from generating electricity from thermal coal.

"This has caught a few speculators short, and they've scrambled to cover -- in turn, pushing API4 [FOB Richards Bay coal derivatives] and Newcastle with it," the market participant said.

In European trading hours Wednesday, two 25,000-mt parcels of November-loading Newcastle 6,000 kcal/kg NAR thermal coal traded at $80/mt FOB, after a November parcel of the same size traded at $79.50/mt in the Asian market.

In early September, Newcastle 6,000 kcal/kg NAR cargoes for loading in October and November went through globalCOAL's trading screen at $75/mt and $77.50/mt FOB, respectively, the lowest trading level since November 2009. OCTOBER CONTRACT PRICE TALKS BEGIN IN JAPAN

Australian thermal coal producer Glencore Xstrata started talks Wednesday with key Japanese customer Tohoku Electric Power for an annual supply contract that starts delivery October 1, traders said.

"Negotiations between Xstrata and Tohoku began in Japan this week," said one trader. "Demand in the [Newcastle] market has been stable or lower."

Sources estimated that the price for the October-year contract would be $85-86/mt FOB Newcastle basis 6,322 kcal/kg GAR -- lower than the benchmark price for July-year Japanese supply contracts at $89.95/mt FOB for the same calorific value Australian thermal coal.

"No price level yet has been indicated, but it will be lower than July at $89.95/mt FOB," a source said.

Newcastle thermal coal on a 6,300 kcal/kg GAR basis is comparable to 6,000 kcal/kg on a net-as-received basis.

Glencore Xstrata announced September 10 that it was putting its giant Wandoan project in Queensland, Australia, for exporting thermal coal on hold for the short to medium term because of current low coal prices and market oversupply. One market source said Australian coal producers might be hinting to their Asian coal customers at slower production growth in the year ahead as they take action to reduce the pipeline of new coal mine projects to prevent too much supply from hitting the market.

Near term, the prospects for Newcastle thermal coal prices were considered dim by some market players.

"The fundamentals for Newcastle physical [coal] are poor coming into Q4 -- we see a lot of surplus tons around and still little demand," a source said.

In Asian trading Thursday, prices for Newcastle 6,000 kcal/kg NAR thermal coal were looking firmer.

Newcastle 6,000 kcal/kg NAR 25,000 mt parcels for November loading were bid at $79.30/mt FOB to an offer at $80.50/mt, and December-loading parcels had a bid-offer spread of $80.40-81/mt on globalCOAL.

Source: Platts