Regional Coal: Xstrata, Taipower settle thermal coal contracts

Taipower seems to have snapped up great deals on four one-year coal contracts, a move that threatens to drag down other coal contract prices, Taipe Times reported Saturday.

Xstrata Plc, the world's biggest exporter of coal used in power plants, agreed to sell coal to Taiwan Power Co for less than exporters have been targeting, which may drag down other contract prices, Citigroup Inc said.

The Zug, Switzerland-based Xstrata agreed on four one-year contracts with the utility for next year at about US$40 a tonne excluding insurance and freight costs, US$5 less than Australian exporters had been aiming for, Citigroup said in a report on Thursday. The contract volumes may be small, it said.

The accord comes before Xstrata and rivals such as Rio Tinto Group start talks with Japanese utilities to set prices for the year beginning April 1. Taiwan accounts for 19 percent of Asia's thermal coal imports, while Japanese users such as Chubu Electric Power Co account for 40 percent.

"These latest agreements are likely to create negative sentiment ahead of other key contract negotiations in the next few months," Alan Heap, director of commodity analysis at Citigroup in Sydney, said in the report. "We continue to forecast flat thermal prices for 2006, again emphasizing an associated downside risk."

The globalCOAL index for coal delivered from Australia's Newcastle port, the world's biggest coal-export harbor, fell 2 percent to US$39.27 in the week ended Nov. 4. The index is now 25 percent lower than the US$52.50 a tonne benchmark Japanese 2005 contract quoted by Citigroup and down from US$51.99 in early July, amid increasing supplies from Australia and Indonesia.

The four Taiwan Power contracts were the only one-year contracts of nine recently put out to tender by the Taiwanese company, Citigroup said. The others, which are four-year, five-year and six-year contracts, have yet to be awarded, it said.

Hilary Wilson, a spokeswoman for Xstrata in Sydney, said she couldn't immediately comment.

The level of the reported Taipower contracts "is a good indicator of the way things are trending," said Graham Wailes, an analyst at AME Mineral Economics Pty in Sydney. "You have to ask whether that means the bulk of the market will be around that threshold, but I don't necessarily think so. You've got to look at the bulk of the tonnage and you've got to look at costs, which have escalated significantly for a lot of producers."

Wailes said he still expects the Japanese benchmark contracts to be settled at more than US$45 a tonne.

Benchmark thermal coal contract prices may fall as much as 17 percent next year, the first drop in three years, because of increased supplies from Australia, Indonesia and China, Credit Suisse First Boston said in an Oct. 31 report. Prices may fall to US$45 next year, down from a record this year, it said.

The coal sold under the contracts with Taiwan Power, known as Taipower, has a lower energy content than the average for Newcastle coal, Citigroup said.

"It's the first 2006 contract price that's been settled," said Tom Price, an analyst on Citigroup's commodities team in Sydney. "The important thing is that the exact price and contract volumes weren't reported, so that there is a possibility that it's very small volumes. We just see it as a generally negative signal."

Taipower received offers from Australian and Chinese producers for all the contracts, while Indonesian producers were excluded from the tender process because next year's scheduled Indonesian imports already exceed the company's limit for deliveries from that country, Heap said, citing Taipower.

The nation may import 50 million tonnes of coal this year, of which 46 percent may be from China, Citigroup said.(*)