Chinese demand raises Australian coal prices

In the latest contract price for Australian thermal coal for a Japanese utility, the Tokyo Electric Power Company Incorporated (TEPCO) and the Swiss-based Xstrata plc have reportedly agreed on a price of $85 per ton for a long-term contract commencing in January 2010.

The majority of the coal imported by Japan is based on contracts that begin on April 1 each year, which is the beginning of the Japanese financial year. Some contracts, usually for smaller volumes, are signed mid-year as well. Japanese utilities use up to 50 million tons per year of thermal coal, with Australia fulfilling approximately 60% of the demand.

Previous contracts signed for deliveries starting in April 2009 reflected a price of about $70 to $72 per ton, and prices had dropped considerably from the high prices negotiated earlier in 2008. For example, a contract signed in September 2008 by TEPCO and Xstrata covering thermal coal for the period October 1, 2008, to September 30, 2009, had a price of $155 per ton.

The price of Australian thermal coal, described as containing less than 1% sulfur, 14% ash and with a thermal value of 12,000 British thermal units per pound weight, remained relatively constant for the three years ending June 2007, at an average of between $55 and $60 per ton. However the price then began to climb dramatically, reaching a peak of $192.86 per ton in July 2008, before falling equally dramatically to a low of $65.36 in March 2009.

The fall in prices from the previous high was due largely to a drop in electricity demand in Japan and lower crude oil prices through 2008. However, with the increased demand from China and possible limitations to the available supply, Japanese utilities have become concerned about the continued stable supply of thermal coal and have been forced to act to secure the supply, even if it is at increased prices.

China's combined imports of thermal and coking coal reached about 41 million tons during 2008, and for the first 10 months of 2009, the figure reached 97 million tons, leading to speculation that the country may reach import levels of more than 200 million tons per year in the future. The position in China has been exacerbated by the closure of coal mines in the Shanxi region of the country.

A further cause for concern for the Japanese utilities is that Indonesia likely will need to reduce its exports of thermal coal as a result of domestic obligations, releasing just 15 million tons for export in 2010 and 6 million tons in 2011. These supply deficiencies and increased demands, from China and India, could lead to global thermal coal inventory levels falling from a level of 40 million tons in 2009 to 22.7 million tons in 2010, and even less in 2011.

The acceptance of TEPCO of the increased price, the continuation of Chinese and Indian demand, and prices in China have caused suppliers of thermal coal to speculate that prices negotiated for contracts covering the Japanese financial year starting in April 2010 could reach $90 per ton.