- Rio Tinto has lowered the price of the annual benchmark thermal coal contract with Japan by almost a fifth, as producers continue to struggle with an oversupplied market.
The Anglo Australian miner has settled the first annual supply agreement with a Japanese utility company at $67.80 a tonne for coal with an energy content of 6,322 kcal/kg, according to a person with knowledge of the negotiations. That is 17 per cent below the price achieved last year.
Tohoku’s agreement with Rio will surprise many in the coal market. Traditionally Xstrata, the largest supplier of Australian coal to Japan — and then Glencore, after it took the miner over in 2013 — have led the coal benchmark talks with Japanese utilities.
But they were not able to come to agreement this year, allowing Rio to take the lead in the negotiations. Glencore was rumoured to be holding out for $75 a tonne, while Tohoku wanted a price nearer $65.
Thermal coal is the largest source of energy for power generation and a key commodity for several global mining houses, such as Rio Tinto and Glencore.
A supply glut has pushed the price of Australian thermal coal — the benchmark for Asia — down by more than 60 per cent since early 2011. It has fallen 10 per cent this year. This has put buyers in a stronger position.
Japanese utilities purchase much of their coal from Australian miners under annual supply agreements that run from April — the start of the financial year in Japan.
The first agreement is closely followed as other Japanese buyers and Australian miners use it to price long-term deals. The April-March contracts have historically accounted for about half of Japan’s annual coal imports of 140m tonnes, although that figure has fallen in recent years. They also act as a reference price for contracts across the Asia-Pacific region.
While Rio’s agreement with Tohoku is 17 per cent below last’s year settlement price of $81.10, traders said it was still a positive outcome for the Australian miners.
“$68 is a very good price,” said one trader. “Converted into Australian dollars they could be getting close to A$100 a tonne, which is better than last year.”
The settlement price is also above the level that benchmark Australian coal has been trading in the spot market and on financial markets. Thermal coal with an energy content of 6,000 kcal/kg was quoted at $58.54 a tonne by Argus, a price reporting agency, at the last settlement on Thursday.
Japanese utilities, which are reliant on high quality Australian thermal coal to fire their power stations, have historically paid a premium to spot prices to guarantee supply.
“These Japanese have built their boilers around premium thermal coal from the Hunter Valley [in New South Wales],” said the trader.
However, it is not clear how much coal Tohoku had agreed to buy from Rio. Traders said it could be less than half a million tonnes.
“In a sense, it may be hard to regard this agreement as ‘the benchmark’,” said one market participant.
In an oversupplied market, analysts believe Japanese utilities will buy less coal through long-term contracts and more on the spot market, where prices are cheaper.
Recent reports have suggested that Japanese purchases of coal from Australia through the April 2015-March 2016 contract could fall to less than 20m this year, down from a rumoured 20m-30m last year and 40m-50m in 2011.