Japan utilities, Glencore set annual coal contract at $110/T

The deals were struck between Glencore and Japanese utilities such as Shikoku Electric, Chugoku Electric and Kansai Electric after bilateral talks, a source at a Japanese coal buyer said, requesting anonymity as he was not allowed to speak in public about commercial deals.

Glencore did not respond to a request for comment.

The deals between Japanese utilities and Glencore give coal markets welcome clarity after Tohoku and Glencore abandoned their talks on an annual contract that traditionally set prices for the region.

A Chugoku Electric spokesman confirmed the utility struck some annual contracts at $110 a tonne with Glencore, but said other deals were agreed at different levels or index-linked prices.

Shikoku Electric said it settled the April-March contract with Glencore last month but declined to disclose the price. Kansai Electric declined to comment.

"We've agreed with Glencore at $110 per tonne for the April-March contract late last month," said another source at a utility directly involved in the talks, also declining to be named.

A trader with a major commodity merchant also confirmed the deals.

The deal marks a breakthrough after Japan's Tohoku Electric and Glencore, the world's biggest exporter of seaborne thermal coal, failed earlier this year to agree an annual supply deal that has in the past been used as an industry benchmark.

The contractual price came in nearly 30 percent higher than an annual supply price a year earlier, and 16 percent above a deal for October 2017-September 2018, reflecting a tighter global market for the world's dominant power generation fuel.

Australian spot thermal coal cargo prices have hit several six-year highs in recent months, and at $120 per tonne remain a third above this year's lows in April, pushed up by a summer heatwave across the northern hemisphere as well as output cuts in China, the world's biggest consumer of coal.

Clarity

The deals between Japanese utilities and Glencore give coal markets welcome clarity after Tohoku and Glencore abandoned their talks on an annual contract that traditionally set prices for the region.

With annual imports of around 115 million tonnes, Japan is one of the world's biggest importers of thermal coal. Its utilities buy around 40 percent of all Australian thermal coal exports.

But volumes under the long-term contract have been declining as utilities try to diversify supply sources and trade more in the spot market as part of Japan's energy market liberalisation.

Still, miners say term contracts will remain important.

"End users like to have a mix of spot exposure and they like to have some certainty in their portfolios – as, I have to say, producers also benefit from," Paul Flynn, Chief Executive at Whitehaven Coal said in an earnings conference call on Tuesday. Japan is Whitehaven's biggest customer.

"Despite the gyrations that you've seen over the last 18 months and two years, in particular, with the setting of those prices, I think both sides of that equation continue to have a commitment to maintain both pricing regimes."

In a sign the decades-old practice of buyers and miners bilaterally working out a fixed price will continue, Tohoku and Glencore have already begun preliminary talks on an October 2018-September 2019 annual contract, multiple sources said.