Reuters Coal miners, Chubu agree 44 pct annual price cut-trade

Coal miners, Chubu agree 44 pct annual price cut-trade
PERTH/TOKYO, March 10 (Reuters) - Xstrata and Rio Tinto Ltd have sealed thermal coal contracts with Japan's Chubu Electric for fiscal year 2009/10 at prices as much as 44 percent lower than a year earlier, coal traders familiar with the negotiations said on Tuesday.

The first major price deal between big Australian coal miners and the Japanese utilitie, their main customers, normally sets the tone for further negotiations for contracts that cover the April to March Japanese fiscal year, affecting power plant costs and miners' revenues for the year.

Xstrata's (XTA.L) coal unit in Australia and Rio Tinto Coal (RIO.AX)(RIO.L) struck an agreement with Chubu (9502.T) early this week at prices of between $70 and $72 a tonne, compared with last year's benchmark prices that were set at around $125 a tonne, the traders said. Spokesmen from Xstrata and Rio as well as a Chubu official declined to comment on commercial arrangements.

"Chubu has reached an agreement with Xstrata at between $70 and $72 a tonne," said a trader based in Japan.

At least two trader sources who are familiar with the negotiations confirmed Xstrata's much-watched price, which was based on free-on-board (board) prices for coal with a heating value of 6,322 kcal/kg (GAR). Four other sources from Australia and Japan without direct knowledge of negotiations said the settlements for Xstrata and Rio hovered at about $70 a tonne for coal with the same calorific range.

TWO TIER MARKET
The benchmark price of around $70 will probably be limited to Japanese utilities. Other Asian buyers in South Korea and Taiwan are expected to push for much lower prices because they do not need the branded coal sought by the JPUs.

A South Korean utility source said he was disappointed with the headline price as they were targetting $67-68 a tonne FOB Newcastle. Other Asian buyers will accept lower-grade Australian coal which has been blended with semi-soft coking coal and pulverised PCI material, traders said.

A two-tiered market of standard grade Australian thermal coal and discount-priced blended material has been in place for several months and this is likely to continue, traders said. This reflects the surplus supply of semi-soft and PCI coal which producers are still struggling to sell, traders said.

Xstrata's and Rio's settlement price marks a near $10 premium to current spot prices, which are around a 21-month low of $61.75, based on latest globalCOAL's Newcastle price index. Producers from Australia and Indonesia, as well as Asian buyers, had a mixed response to the prices. Some miners said the price was a touch low, while other producers said it was a healthy premium given how soft the market was.

"The price is right on mark. It shows producers still have an advantage in setting prices," said Shun Ohashi, an energy analyst at Sumitomo Corporation. Trade sources said executives from Xstrata and Rio were initially scheduled to leave last weekend after negotiations hit a snag, but both firms eventually lowered their offers to around $70 a tone, which Chubu accepted this week.

Thermal coal prices have shed nearly 70 percent since striking a record-high $201 a tonne last July, pressured by slumping demand from the industrial sector and increased supplies as producers divert more low-grade coking coal material to the power generation market as demand from steelmills slumps. source: Reuters 10 March 2009