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MAY 9, 2017 by: Neil Hume, Commodities and Mining Editor One of the most important contracts in the commodities industry has finally been signed with a big Japanese utility company agreeing to pay almost $10 a tonne more than the market price to secure supplies of high-grade Australian coal.
The annual negotiations between Tohoku Electric Power and Glencore, the Swiss-based miner and commodity trader, are closely followed by the industry because they are used to price supply contacts across the vast Asia market.
After protracted talks, the two sides agreed on a price of $85 a tonne for the contract which runs for a year between April to March, according to people with knowledge of the discussions.
While that is lower than Glencore’s opening shot of about $95 a tonne, it is above last year’s settlement price of $61.10 and the current market price for Australian thermal coal with an energy content of 6,000 kcal/kg. That material was assessed at $76.48 a tonne by Argus on Friday.
It is also significantly above Glencore’s cost of production, which the company put at $44 a tonne in a recent results presentation.
“$85 a tonne is a very good outcome for Glencore,” said Hunter Hillcoat, analyst at Investec Securities. “No one can complain.”
Thermal coal is burnt in power stations to generate electricity. The latest deal follows a dramatic surge in coal prices last year brought about by China’s decision to curb output in an attempt to improve the profitability of its coal industry.
The move forced power plants and traders to source material from overseas, driving the price of Australian supplies to more than $100 a tonne.
Although the restrictions have now been lifted, prices remain well above where they were a year ago, to the relief of big producers which struggled during a multiyear downturn in the coal market. China has said it could reinstate the supply restrictions if local prices fall too far.
Glencore is the world’s biggest exporter of seaborne thermal coal. The company, led by billionaire Ivan Glasenberg, expects to produce about 135m tonnes from its mines in Australia, Colombia and South Africa this year.
It failed to reap the full benefit of last year’s explosive rally because of a decision to hedge, or sell forward, roughly half its export volumes — or 44m tonnes of coal. Most of those hedges have now rolled off.
The April-March contracts between Australian suppliers and power utilities have historically accounted for up to half of Japan’s annual thermal coal imports, which totalled 110m tonnes last year, according to the Ministry of Finance.
Traders say that figure has fallen in recent years but the negotiations are still important because they are used by other coal consumers across Asia as a reference price for their supply contracts.
Japan’s power utilities are prepared to pay a premium to secure supplies from Australia on long-term contracts because the coal works well in their boilers and meets environmental controls.
Tohoku signed a number of deals with smaller Australian producers this year as the talks with Glencore dragged on and it held out for a contract price below $90 a tonne.
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