October 07, 2008

2008 thermal coal price likely to reach record levels

Reuters reported that Japanese utilities have begun talks with some Australian producers for 2008 thermal coal contracts that could be sealed at a record high above USD 90 amid tight global supplies. Miners and analysts have said that coal supplies are set to tighten significantly this year on continued supply constraints in Australia and Indonesia as well as growing Asian demand, particularly in China and India.

As per report, marketing teams from Xstrata Plc and Rio Tinto Limited are in Tokyo this week, hoping to negotiate a near 80% jump in contract prices at about USD 100 a tonne, but Japanese buyers are seeking between USD 15 to USD 20 below that.

Mr Malcolm Southwood a resource analyst at Goldman Sachs in Melbourne said that "Our forecast is for prices to be settled at USD 90 but recent developments would suggest that there are some upside risks to the price. The emergence of China and India as major importers has been a critical factor in tipping the market balance. And when you add supply constraints in Australia and South Africa into the equation, you get a very tight market."

The report cited an executive of Rio Tinto as saying that “Its initial offer to Japanese utilities would be in the range of USD 90 to USD 100. The market is a lot tighter this year. But some Japanese utilities are still hoping to get something at USD 80 or even USD 90 levels, which I think is quite impossible. This could be a long drawn out negotiation."

Industry sources said that Xstrata and Rio have yet to put in firm offers, as prices on the index, commonly used as a benchmark for coal prices in Asia, were still hovering in the USD 90. This signals that they may be targeting higher levels on forecasts of even tighter supplies and rising demand from Japan and China, which are grappling with power shortages due to high prices of other fuels as well as outages.

Other Japanese buyers said that it was unreasonable for prices to jump this high when South Korean utilities managed to ink their 2008 coal contracts at about USD 60 a tonne. Some Japanese utilities have also agreed with Indonesia's Bumi Resources to buy 2008 coal supplies at about USD 85 a tonne in November.

In the 2006 fiscal year, Japan imported 179 million tonnes of coal, of which about 60% came from Australia, 20% from Indonesia and 12% from China.

Japan’s coal price in past 5 year and the current fiscal is as under