Glencore Xstrata Plc (GLEN), which sets prices for Australian power-station coal contracts, is poised to sell the fuel to Japanese utilities at the lowest level in five years as supplies swell.
Electricity producers in Japan, the world’s second-biggest buyer of thermal coal, may pay $88 a metric ton for annual supplies starting April 1, according to the median estimate of five analysts in a Bloomberg News survey. That would be the lowest since 2009 and down from last year’s price of $95. Spot prices fell 7.3 percent in January to $80.01, decreasing the most since June, data from globalCOAL in London show.
A price cut may help boost profit at utilities such as Tokyo Electric Power Co., whose fuel costs have doubled from three years earlier after the 2011 Fukushima disaster shut Japan’s nuclear reactors. Coal dropped 6.5 percent in 2013 for a third year of declines as producers from Indonesia to Australia added to a supply glut estimated by Morgan Stanley to be about 5 percent of annual seaborne trade.
“Adequate supplies in northern Asia have been a bit of a headwind to price recently,” said Daniel Morgan, an analyst at UBS AG in Sydney. The bank forecasts annual contracts with power producers in Japan may be agreed at $85 a ton, which “reflects a premium for security of supply,” he said.
The price Japan’s utilities negotiate with Glencore is typically used as a benchmark for contracts across Asia.
Negotiations will probably start next month, according to Hiroki Enami, a Sendai-based spokesman at Tohoku Electric Power Co. Yusuke Kunikage, a spokesman at Tokyo Electric, and Francis de Rosa, a Glencore spokesman in Sydney, declined to comment on the talks.
Power producers in Japan agreed to pay a record $129.75 a ton for annual supplies in 2011 as flooding curbed output in Australia and Indonesia, the world’s biggest exporter. The 2013 contract was below $100 for the first time since 2010. The forecasts for 2014 ranged from $85 to $90 in the survey.
Japan has increased buying of fossil fuels after the Fukushima disaster led to the shutting of the nation’s nuclear plants. Coal imports rose 1.3 percent from a year earlier to 109 million tons last year, according to Finance Ministry data on Jan. 30. The country purchased 107.7 million tons in 2012 and 101.2 million in 2011, customs figures show.
“Globally, we saw coal demand reach new highs” last year, Gregory H. Boyce, the chairman and chief executive officer of Peabody Energy Corp. (BTU), the largest U.S. producer of the fuel, said last month. “Supply, though, was also strong in 2013 and seaborne prices declined as shipments outpaced demand.”
Coal has been in a bear market since March 2012 after dropping 20 percent from its peak in January 2011. Prices slid as low as $76.70 a ton in September, 61 percent below a record $194.79 reached in July 2008. They were at $77.79 in the week ended Feb. 7, according to globalCOAL.
Japanese utilities will continue to pay for contracted coal supplies at levels above market prices “for the foreseeable future,” Wood Mackenzie said in a report on Jan. 30. The premium will fall below $7 a ton by 2015 and decline to as low as $3.80 from 2016 to 2020, Wood Mackenzie said.
“The market will be progressively tight as other customers increase their consumption of this type of coal,” Prakash Sharma, an analyst at Wood Mackenzie, said in the report. “Even if headlines suggest Japan is increasing imports from North America to reduce reliance on Australian producers, the negotiations are still of great importance to Japan.”
Tohoku Electric, Japan’s third-biggest user of thermal coal, plans to increase imports from the U.S. and Canada to cut costs and reduce its reliance on Australian supplies, Takayoshi Enomoto, the fuel department’s group manager, said last month. The utility will nearly double North American purchases of the fuel to 5 percent of its total, he said.
Japan is the biggest buyer of Australian thermal coal, importing 77.6 million tons in the year ended June, according to a December report from the Bureau of Resources and Energy Economics in Canberra. That’s equivalent to about 43 percent of Australia’s total exports of the fuel for that period. North America supplies 2 percent of the nation’s requirements, according to Wood Mackenzie.
Weaker seasonal demand and adequate stockpiles at ports and electricity generators have contributed to an easing in spot prices in early 2014, National Australia Bank Ltd. said in a Feb. 3 note. The relative weakness signals potential declines in Japanese financial year contract prices, the bank said.
Australia’s total exports are forecast to climb 6.5 percent to 196 million tons this year, a separate December report from resources bureau shows. Indonesia plans to cap output at about 400 million tons this year, 5 percent less than 2013’s level, to stem declining spot prices, the government said this month.
The surplus of seaborne thermal coal is projected to drop to about 4.9 million tons in 2014 from 40.8 million, Morgan Stanley said in a note on Jan. 22. The bank forecasts contracts may be settled at $90.
“As Asia starts to fire up again post-Chinese New Year and into the summer, I think you will see a bit of a support in the price,” said Morgan at UBS.
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