Xstrata, Japan annual coal contract talks seen next week

Mar6, 2012

* Contract starts April 1, represents 30 pct annual supply

* Tohoku seen as lead negotiator for Japan utilities

* Xstrata eyes $125/tonne, most see price between $115 and $120

PERTH/TOKYO, (Reuters) - Annual negotiations between Japanese utilities and Australian coal producers for the Asian benchmark thermal coal contract starting on April 1 are expected to begin next week when Xstrata's lead negotiator is expected in Japan.

The annual contract prices are set by mining major Xstrata Coal, the world's largest exporter of power-station coal, and large Japanese utilities including Tokyo Electric Power Co (TEPCO), Tohoku Electric Power Co Inc and Chubu Electric.

"I understand Xstrata may send a proposal by email later this week," a Sydney-based broker said, adding that Xstrata would then send its negotiator to Japan for talks next week.

The annual negotiations often drag on for weeks, beginning with preliminary talks, which have already got going, and include meetings in both Australia and Japan.

This year, with TEPCO still recovering from the blows dealt to its business from last year's earthquake and tsunami, Tohoku Electric is expected to act as lead negotiator.

Demand for coal from Japan is likely to recover this year after falling sharply since March last year, when the earthquake and tsunami damaged some coal-fired power plants and infrastructure.

"In Japan, almost one year has passed since the disaster and a steady recovery means the capacity (for coal) has been much more," the Sydney broker said.

In February, Japanese power demand rose for the first time since last year's earthquake after colder weather temporarily caused a spike in heating demand.

Still, with coal prices globally weaker, Xstrata and other Australian producers are likely to have to settle the 2012 contract at a price below the record of $130 per tonne set last year, market sources said, with most expecting the final settlement price to be in the $115-$120 per tonne range.

"Over $120 per tonne seems challenging. Shippers have all been very bullish on the price," the broker said.

STABLE SUPPLIES KEY

The annual contract price is usually struck around spot price levels, which have been falling in recent weeks. On Friday, the globalCOAL index for Newcastle coal settled at $111.07 per tonne, down $5.48 from the previous week.

Japanese utilities settled their annual coal contract beginning on Jan. 1, which represents about 10 to 15 percent of Japan's annual imports, for about $115 per tonne. The April contract, the largest of the year, represents 30 percent of yearly thermal coal imports.

The relatively low globalCOAL index price may help Japanese utilities put pressure on the final annual contract price.

"The Japanese are saying prices are inflated as it is, let alone above the index," one Sydney-based market source said, but added that Japanese utilities are a relatively captive market.

Japanese environmental regulations require coal-fired plants to minimise their emissions, making higher quality Australian coal a better option.

Supply security, especially in light of last year's nuclear disaster in Japan, has become paramount, a Japanese utility source said.

"The importance of stable supplies have become more prominent than ever at a time the utilities cannot restart nuclear reactors. So it is not a time, I think, where they would make big changes in (their purchase volumes)," the source said.

Rain disruptions to production in Australia's Hunter Valley may also support prices, market players said.

"Long term, I think Xstrata's pretty tight on that good-quality coal. I think that is why they are not rushing," another Sydney-based source said.

(sourced Reuters)