Glencore, Tohoku reach settlement on term coal price

Leading Japanese buyer Tohoku Electric Power and Australian producer Glencore have reached an agreement on October-starting term supplies of thermal coal, after Glencore appeared willing to compromise and dropped its asking price significantly, market participants said today.

The two companies have settled at a fixed price of around $109.77/t for premium GAR 6,322 kcal/kg Australian coal, the market participants said, after starting their talks last month for supply from October 2018 to September 2019. The parties normally decline to release details of their agreement or volumes involved.

The agreement marks the new reference price for October-starting term supplies. Parallel negotiations between other smaller Australian producers and Japanese utilities are expected to follow this price.

The talks were also concluded relatively quickly in comparison to the drawn-out, fraught negotiations of previous years. This, and the collapse in June of the other annual Glencore-Tohoku negotiations for April 2018 to March 2019 supplies, suggest Glencore may have been willing to compromise to restore confidence to the reference price system, trader and producer officials said today.

The future of the fixed-price benchmark negotiations appeared unclear in June after Tohoku walked away from the negotiations but two smaller Japanese utilities, Shikoku and Chugoku, stepped in to reach their own separate agreements with Glencore in July at $110/t.

Tohoku this time bid at around $107/t compared with Glencore's $117/t, but the parties narrowed the disparity to around $5-7/t last week and have managed to settle as the contract took effect on 1 October. The fact that Glencore was willing to drop more than $7/t to below $110/t was probably intended as a signal to Tohoku and the industry that the company would like to keep the term reference price system going, and that it is a reliable supplier and prepared to compromise.

On the other hand, the coal producer may also have been more willing to negotiate a deal because the final settlement price is not too far under the current spot price for volumes larger than 50,000t, which was assessed by Argus at $112.51/t on 28 September for fob Newcastle NAR 6,000 kcal/kg coal with a minimum calorific value (CV) of 5,700kcal/kg. A smaller parcel of 25,000t of fob Newcastle NAR 6,000 kcal/kg coal with a minimum CV of 5,850 kcal/kg also traded today on Global Coal at $114.10/t for December loading.

The October agreement at $109.77/t compares with an average Argus-assessed price from January-September this year of $106.92/t, up by $22.25/t from the same time last year, and a July-September average of $115.48/t this year. But markets have been easing since they touched a quarterly high of $119.05/t on 20 July during a summer heatwave in Japan, a key buyer of this coal.

The high-CV Australian coal has been in shorter supply than previous years, while the latest October settlement price is also significantly higher than the $94.75/t concluded in the year-earlier agreement between the parties covering October 2017 to September 2018. At that time, the October settlement was the highest price reached for a term contract between Tohoku and Glencore since July 2013.

Prices have also been supported during this summer and its aftermath, with Japan importing record volumes of thermal coal in August as the country struggled to meet unseasonably high power demand. Receipts exceeded 11.2mn t in August — the highest for at least six years and a likely record for monthly coal imports.

Australian coal was particularly sought after and accounted for up to 8.1mn t of Japanese imports in August. Australian imports probably also rose following the supply agreements between Glencore and Japanese utilities Shikoku and Chugoku in July.