Xstrata Said to Agree on Coal Contract at Lowest Since 2009

Xstrata Plc, which sets prices for Australian thermal coal contracts, was said to sell a year’s supply of the fuel to Tohoku Electric Power Co Inc. at the lowest settlement price since 2009.

The world’s biggest exporter of thermal coal will sell the fuel at $95 a metric ton for annual supplies starting April 1, said two people with knowledge of the deal who asked not to be identified because the information is confidential. That’s 17 percent below the 2012 settlement of $115 and the lowest since deals at $70 to $72 in 2009. Spot prices have dropped the past four weeks to $86.75, data from IHS McCloskey show.

Coal producers including Rio Tinto Plc and Whitehaven Coal Ltd. have shed workers as higher costs and lower prices crimp returns. Tohoku has agreed to a deal with the Xstrata, said Hiroki Enami, a Sendai-based spokesman, declining to give a price for the accord. Francis De Rosa, a Sydney-based spokesman for Xstrata, declined to comment on contract negotiations. The settlement is the first below $100 a ton since 2010 and lower than the median estimate of $98 in a Bloomberg News survey.

“For the Australian producers, it’s not the best outcome,” said Daniel Hynes, the head of commodity strategy at CIMB in Sydney. “It puts a big question mark over future expansions and projects in the short-term. Current operations at the top-end of the cost curve would also have to be seriously analyzed and reviewed in light of this new pricing.”

Contract Prices

Japanese utilities 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, according to Xstrata. Contracts were settled at $98 a ton in 2010. The price utilities in Japan agree with Xstrata is typically used as a benchmark for contracts around the region.

Coal at the Australian port of Newcastle, the benchmark grade for Asia, slid 1.2 percent in the week ended April 5 to the lowest since November, IHS McCloskey data show. Prices averaged $94.29 last year after slipping to a three-year low of $78.05 on Oct. 19, according to IHS.

Prices in Asia are poised to stall after the biggest quarterly gain in two years as demand from China fails to absorb increased exports from Australia, Colombia and Indonesia, according to analyst estimates compiled by Bloomberg. Japan’s coal-import growth is projected to drop 2 percent this year, Australia’s Bureau of Resources and Energy Economics said in a March report.

Xstrata last month said it would consolidate its Australian coal operations, while Rio said it was taking steps to reduce costs in an industry facing a challenge to remain globally competitive. Whitehaven cut workers because of continued weakness in prices, an unfavorable foreign exchange rate and increasing pressure on operating margins.