Macquarie Thermal coal settlements

Event
Japanese power utility (JPU) Chubu has apparently settled thermal coal contracts with Rio Tinto and Xstrata at around $70/t. News agencies report prices of $70-$72/t. We have heard $69.95/t to $71/t.
The thermal coal reference price is set in Japan by contracts with Chubu and Tohoku, the largest of the JPUs. It is not absolutely certain that the other JPUs will fall in line with the price set by Chubu, but they generally do. Therefore, $70/t is as this point the thermal coal reference price for Japanese fiscal year 2009/10.

Impact
A Japanese reference price of $70/t is roughly in line with market expectations.
This price is an ~$10/t premium to the Newcastle spot market, consistent with our view of a two-tiered market, where Japanese customers are prepared to pay above market to secure their preferred thermal coal brands. The settlement premium this year may also reflect a deal to cancel carryover tonnes on existing ($125/t) contracts.
The drivers of this premium are specific to the Japanese contract market. We do not expect the same premium to translate into other contract markets or into the spot market. This contract does not create a floor for thermal coal prices. In fact, we are bearish on the outlook for spot prices and have noted on a number of occasions that other destinations, particularly Korea, are likely to pay significantly lower prices than the Japanese. Risk to spot prices remains to the downside. If this settlement drives any rally in the spot thermal coal price, we believe it will be very short-lived.