Coal to Japan seen near record

Xstrata Plc, the miner that sets prices for Australia’s thermal coal exports, is poised to keep contracts within $4 of last year’s all-time high as it negotiates with Japanese utilities recovering from the March 11 earthquake.

Japan’s electricity producers may agree to pay from $115 to $126 a metric ton for annual supplies starting April 1, according to estimates from five banks surveyed by Bloomberg News. Utilities, including Chugoku Electric Power Co., paid a record $129.85 a ton last year in yearly contracts with Xstrata after rain in Australia, Indonesia and Colombia cut output.

Thermal coal sales to Japan, the world’s second-biggest buyer of the power-station fuel, are set to rebound this year, according to Citigroup Inc. Purchases may rise 3 percent to 104 million tons in 2012, exceeding last year and 2010, Daiwa Capital Markets says. All but two of Japan’s 54 nuclear plants remain idle almost 12 months after the March 11 disaster, boosting the need for thermal generation.

“Talks are coming at a critical juncture,” said Daniel Hynes, a director of commodity research at Citigroup in Sydney who says prices may reach $122 a ton. “The utilities will play up in negotiations that they’re still restricted, that demand isn’t back to normal levels. The longer it goes, the better chance the producers have of getting a better price.”

Thermal coal at the Australian port of Newcastle, the spot- market benchmark price for Asia, slipped 12 percent to $111.35 a ton in 2011 as growth slowed in China, the world’s largest coal importer, and output increased with drier weather in Australia, the second-biggest exporter. Prices dropped $2 to $115.60 a ton in the week ended Feb. 24, according to IHS McCloskey, a Petersfield, U.K.-based provider of data.

Electric Power Development Co., also known as J-Power, has started price negotiations with Xstrata for Australian supplies for the next fiscal year, Hiroshi Nakatani, a Tokyo-based spokesman, said by phone. The company is the largest coal buyer in Japan, purchasing about 20 million tons a year.

“We don’t know when the negotiations will be finalized,” Nakatani said, declining to comment on the price J-Power is offering to pay. “Sometimes the discussions last into April.”

Xstrata, the world’s biggest thermal coal exporter and the target of a 24 billion-pound ($38 billion) takeover by Glencore International Plc, rose 1 percent to 1,212 pence in London trading yesterday, valuing the company at almost 36 billion pounds ($57 billion).

Xstrata is also negotiating with Tohoku Electric Power Co., Tom Price, an analyst at UBS in Sydney, said in a phone interview. He declined to say where he got the information. UBS forecast coal contracts will be set at $125 a ton.

‘Bargaining Advantage’

Kathryn Lamond, a Sydney-based spokeswoman for Xstrata, wouldn’t comment on contract negotiations. Hiroki Enami, a spokesman for Tohoku in Sendai, declined to say whether the company was in contract talks.

“The producers led by Xstrata have managed to get good outcomes over the last couple of years, and that bargaining advantage doesn’t seem to have changed,” said Hayden Atkins, an analyst at Macquarie Group Ltd. in London who forecasts contract prices may be set at $125 a ton. “It does appear that the coal burn has recovered to levels seen before the disaster in March last year, so they will be back to at least 2010 levels.”

Japan’s thermal coal imports rose almost 8 percent in January from a year ago, according to a preliminary report from the Ministry of Finance on Feb. 20. The country bought 101.2 million tons last year and 101.6 million in 2010, customs data show.

Tohoku, Japan’s third-largest coal buyer, plans to restart two power generators at Haramachi with a capacity of 2,000 megawatts by the middle of 2013, Enami said. The plant, located in Fukushima prefecture, was damaged by the quake and tsunami. While Enami declined to comment on whether the company is in annual price talks with Xstrata, Tohoku does buy coal from Australia, he said.

Japan’s 10 regional utilities, excluding J-Power, purchased 48.9 million tons of coal in 2011, 2.9 percent less than the previous year, according to data from the Federation of Electric Power Companies of Japan.

Akio Miyazaki, a spokesman for Chubu Electric Power Co., declined to say if the company is in price negotiations with Xstrata. The utility imported about 11.2 million tons in the fiscal year ending March last year for its coal-fired plant and for resale to other users by its subsidiary, Chubu Energy Trading Inc., he said.

Every one of Japan’s 54 nuclear reactors may be shut by late April for scheduled maintenance and safety tests following the radioactive leak at the Fukushima Dai-Ichi plant that followed the quake. Coal imports will increase by 6.3 million tons from 2010 levels if Japan doesn’t start any nuclear plants, according to a December report compiled by Shigeru Suehiro, a senior economist at Institute of Energy Economics, Japan. The nation may suffer blackouts as early as next month, Mitsubishi Corp. International Europe said Feb. 21.

Japan’s utilities are “likely to have a higher tolerance for stronger pricing than anyone else in the seaborne market” because freight rates are low and alternative fuels are becoming increasingly expensive, Macquarie’s Atkins said.

Coal prices are also getting support from unfavorable weather in New South Wales, Australia’s largest thermal coal region. Whitehaven Coal Ltd. closed four mines and lost about a week of output because of rain in the state’s Gunnedah Basin, it said in February. Spot prices rose to $138.50 a ton in January 2011, the highest since September 2008, after flooding shut mines and damaged rail lines.

“The supply side constraints have certainly played on the price,” Citigroup’s Hynes said. “The supply chain isn’t as flexible as it was last year, partly because the industry hasn’t really fully recovered.”