Coal news and updates

Coal's recession is officially over with Glencore inking a near 50 per cent increase in annual reset of the price of high quality Australian thermal coal that it ships to a key Japanese power utility, Tohoku Electric.

 

While spot and quarterly coal prices have been riding high over recent months the unexpected strength of Glencore's settlement is rewarding affirmation that China's efforts to constrain the least viable and dirtiest of a massive fleet of domestic mines is having real and potentially lasting effects on the seaborne coal market.

 

Coal's sceptics and supporters alike have watched the price surge through 2016 with most everyone imaging that the recovery would be temporary and few trusting that China would hold the line on its commitment to remove upwards of 450 million tonnes of production from the world's biggest coal system.

 

But by accepting a price increase from $US65 a tonne to a year's worth of $US95 a tonne, Tohoku Electric has effectively announced that Japan Inc does not imagine there is much downside in coal pricing over the near term.

 

The spot price of equivalent quality coal hit nearly $US100 a tonne on Tuesday and the average price for high-quality thermal exports from Newcastle has been $US92 for the month so far. That is the highest monthly level since May 2013.

 

Since then, of course, the coal sector has gone through one of its classic deep recessions and the producers that have survived have done so by chasing their costs to the bottom end of the curve. Glencore, for example, currently boasts average Australian costs of $US32 a tonne, which announces only that the Tohoku contract will be well in the money this year.

 

The long-term supply contract in question here is relatively small but the timing, quantum and duration of its repricing is significant.

 

Glencore is Australia's biggest coal exporter and it generally leads the two rounds of annual price negotiations on long-term contracts with the major North Asian utilities of Japan, Taiwan and South Korea.

 

There are two important dates on the repricing schedule, October 1 and April 1. The October settlement covers fewer tonnes but is regarded as a reasonable reference for year-end discussions that result in the more substantive April price sets.

 

Just generally, the October price set is generally held to cover about 15 per cent of production that is sold on annual pricing and Glencore's comforting deal involves a contract of about 1 million tonnes a year of premium Aussie thermal.

 

Each of coal's major players takes a distinctly different tack to price discovery these days. Glencore relies more heavily on the traditional annual benchmark negotiation, most particularly with Japanese customers that account for about one third of the company's annual output of 120 million tonnes. As we note further down, it has also embarrassed itself recently by indulging in ill-timed forward selling with the ambition of hedging price risk out until the middle of 2017.

 

Rio Tinto walks a middle ground with a pricing foot in a whole lot of different camps, from annual sets through quarterly and monthly arrangements to shipments price on spot pricing.

 

As you might imagine of the original benchmark buster, BHP Billiton sells all of its coking and thermal coal arrangements on the shortest pricing terms possible with shipments being priced either on the 30-day average of the month of a shipment or on spot.

 

From a Glencore perspective, this week's success is at once rewarding and slightly threatening.

 

The reset affirms finally the consistently expressed confidence of chief executive Ivan Glasenberg in the underlying strengths of the thermal coal market given the inevitability of supply-side contraction on the back of prices that got too low to sustain the sector.

SOurce: AFR