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Thermal coal retreats on fears over Japanese deal

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Australian thermal coal prices — the benchmark for the giant Asian market — have surrendered recent gains as traders fret over the outcome of crucial contract talks with Japanese utility companies.

Physical cargoes from the Australian port of Newcastle were quoted at $58.70 a tonne by Argus, a price reporting agency, at the last settlement on Tuesday, extending losses over the past three weeks to 14 per cent.

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Thermal coal is the largest source of energy for power generation and a key commodity for several global mining houses, such as Glencore and Rio Tinto, for which a recovery in prices would provide a big boost in profits.

The price has fallen 60 per cent since a peak in 2011, largely because of a persistent supply glut.

However, at the start of the month, Newcastle coal was trading close to $69 a tonne following a burst of buying activity, which traders said was timed to coincide with start of discussions between Australian miners and Japanese utilities companies.

Japanese utilities purchase much of their coal from Australia under annual supply agreements that run from April — the start of the Japanese financial year.

Japanese Financial Year contracts have been estimated to underpin 60m tonnes per annum of the country’s total coal imports from all suppliers. Japan buys about 140m tonnes of seaborne thermal coal a year.

In recent years the talks have been led for the producers by Glencore and by Tohoku Electric Power for the Japanese utilities.

Historically the contracts have settled a premium to the Newcastle spot price. This is because the Japanese groups have been prepared to pay up for security of supply and higher-quality coal.

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While this could happen again this year — a price of $69-$70 has been rumoured — traders say many Japanese utilities will buy less coal through contracts and more on the spot market, where prices are cheaper.

Recent reports have suggested that Japanese purchases of coal from Australia through annual contracts could fall to 10m to 15m tonnes, down from a rumoured 20m-30m last year and 40m-50m in 2011.

“Everyone ran for the exit very quickly as soon as they realised there could be fewer tonnes under contract this year,” said Melinda Moore, analyst at Standard Bank in London, referring to the decline in prices. “There was a panic to sell and hedge.”

In an oversupplied market, Stefan Ljubisavljevic, analyst at Macquarie, said a settlement of $69-$70 a tonne would be a coup for those Australian producers able to secure annual contracts with Tohoku and other utilities.

“In Australian dollar terms, that would be up on last year which is amazing because the market is substantially weaker than it was,” he said.

“But the more staggering point is . . . if you look at the derivatives market the 2016 price — which you might look at as some sort of year-ahead reference price — is less than $54 a tonne.”

Aside from the Japanese negotiations, Mr Ljubisavljevic said concern about Chinese demand was weighing on thermal coal prices in Asia.

“China imported around 200m tonnes last year. Currently imports are running at 120m-130m,” he said.

Last year China, the world’s biggest consumer of seaborne thermal coal, introduced protectionist measures to protect domestic producers. This in effect removed the buyer of last resort from the market.

source: http://www.ft.com