Xstrata, Japanese Utilities Agree 2009 Coal Price Cut

By Angela Macdonald-Smith

Dec. 18 (Bloomberg) -- Xstrata Plc, the world’s biggest exporter of power-station coal, has been forced to accept a cut in prices for annual calendar-year contracts for the fuel with Japanese utilities, Citigroup Inc. and Merrill Lynch & Co. said.

Contracts for coal to be delivered in the year starting Jan. 1, 2009, have been settled at $80 a metric ton, lower than existing benchmark contracts of $125 for the Japanese financial year that started April 1, Citigroup and Merrill Lynch said in Dec. 17 reports. The price is below Citigroup’s forecast of $100 for contracts that start April 1, 2009, the firm said.

The weekly index for thermal coal prices at Australia’s Newcastle, a benchmark for Asia, has dropped 60 percent since a July 4 record amid declining demand and lower crude-oil prices and was $78.25 a ton in the week ended Dec. 12, according to the globalCOAL NEWC Index. Most coal imported into Japan is based on contracts for the year starting April 1, rather than Jan. 1.

“Xstrata is a thermal coal-exporting major, and Japan’s coal-fired utilities are all large importers, therefore this agreement would generally be regarded as a benchmark for subsequent calendar year 2009-Japanese Financial Year 2009-10 talks,” Merrill analysts led by Sydney-based Vicky Binns said in the report. “The fact that the contract period is not JFY does not undermine the significance of the deals.”

James Rickards, a spokesman for Xstrata Coal in Brisbane, Australia, couldn’t be reached for comment.

Decline of 48%

The calendar year contract settlement, which are with utilities including Tokyo Electric Power Co., Asia’s biggest utility, “is broadly in line with current spot prices,” Citigroup said. “However, the volumes sold on mid-year contracts are typically smaller than the Japanese financial year-based contracts.”

The last contracts settled between Zug, Switzerland-based Xstrata and the Japanese utilities was in late September at $155 a ton for the Oct. 1, 2008, to Sept. 30, 2009, period, so the latest deals are a $75 “correction,” down 48 percent, Merrill said. The price is the same as Merrill’s forecast for the Japanese financial year ending March 31, 2010, contract of $80, it said.

The settlement is still “a good deal” for Xstrata, given the bearish factors affecting the market such as the “weak” global economic outlook, rising production in China and “weakness” in coking coal markets, which will drive some semi- soft coking coal into the power-station coal market, Merrill said.

Chubu Electric Power Co., Japan’s third-biggest power producer, yesterday posted the biggest drop in industrial sales since 1975 as automakers and machinery manufacturers cut operations. Sales to large users by a group of 10 generators dropped 5.2 percent in November to 69.7 billion kilowatt-hours, the most since 2001 for the month, according to data compiled by the Federation of Power Companies Japan.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net