However, only in near term, say observers; forward prices show bullish outlook.
After iron ore, long-term contract negotiations between Japanese power and Australian mining companies for thermal coal (used by power plants) may also be signed at a lower price, compared to previous deals. Amidst indications of a fall in Japan’s near-term demand for thermal coal, its power producers are understood to be readying for negotiating supply contracts, beginning April.
Prior to the big earthquake, the market was discussing possibilities of a $145 per tonne price for thermal coal used to produce power for 2011-12. This may not hold now, as several Japanese ports and power plants with huge capacities are shut or badly damaged.
Thermal coal producers in the Asia-Pacific may find it difficult to deliver contracted coal to Japan, and prices will probably fall in the region due to oversupply. The situation could stabilise within a few months, however, as demand and prices for thermal coal pick up, said Standard & Poor’s credit analyst, Suzanne Smith.
“For the next three to four months, thermal coal exporters can expect their sales volumes to Japan to drop 10-15 per cent. But this will be only a temporary decline,” she said. “Despite a short-term negative impact on coal producers, the earthquake isn’t a significant negative credit factor.”
Early trends
Japanese companies’ contract prices are still considered a benchmark. The big earthquake came days before negotiations for annual contracts were to begin. This has delayed talks and these are expected to begin any time now. However, leading companies from northern Japan may not participate and some southern Japanese power producers may take a lead.
The contract talks set the price for around 45-50 million mt of Australian thermal coal exports to Japan last year, a considerable quantity of the 125 million mt of thermal coal imported by the latter in 2010.
James O’Connell, managing editor, international coal, for Platts, the premier energy market watchdog, said, “At the moment, the understanding is that the Japanese consumers will continue to request annual contract and annual tonnage under those contracts. Any move away from this traditional agreement could possibly be in favour of some additional spot market exposure.”
He added, “What we have seen in the time since the disaster in Japan is softer prices in Asia for Indian and Chinese consumers, and stronger prices in Europe. Platts have already heard that some cargoes destined for Japan have been redirected to China.”
Barclays commodities’ analyst, Yingxi Yu, said, “The loss of human capital and economic infrastructure means that power demand will be lower (in Japan) in the near future. Several thermal plants and ports have been shut, with some reported to be severely damaged. As a result, Prompt Newcastle prices have eased and we see further scope for near-term weakness, owing to lower Japan imports and the absence of strong Chinese buying. We would put $105/t as a good floor for prices.”
China’s total coal imports plunged to a 20-month low of 6.76 million tonnes in February, down 59 per cent from the record high levels in January and 48 per cent year on year. Within this, thermal coal imports fell to 3.7 mt, the lowest since May 2009, down 57 per cent.
Longer term
Arun Kumar Jagatramka, vice chairman and managing director, Gujarat NRE Coke, said, ”Japan’s demand for coking coal is likely to go up, as there is likelihood of a shift from nuclear energy to thermal power. However, there could be some time lag before this happens.”
However, Barclays feels the medium to long term is bullish for thermal coal, as Japanese demand may go up as a alternate to nuclear power. This has been reflected in the increase in the gap between one-year and two-year forward spot prices of thermal coal in the past two weeks. The gap has widened from $2 to nearly $6, showing a bullish trend after the near term.
In Japan, around half of the total 10.6 Gw of thermal capacity is reported to be seriously damaged and could be closed for months. Reports indicate that the coal terminals in Kashima, Onahama, Ishinomaki and Hitachinaka (together 13.5 mt of import shipments) are badly damaged and may take several months to repair, while the Shiogama and Soma coal terminals have been closed.
