Ben Sharples and Tsuyoshi Inajima London
PRICES for a coal supply deal between Glencore and Japanese utilities that will serve as an industry standard may be set at a six-year low amid competition from other energy sources.
Glencore, the world’s largest exporter of the power-station fuel, will sell annual supplies to Japan starting April 1 at $70 (R840) a ton, according to the median of five analyst estimates. That would be the lowest since 2009 and down from last year’s settlement of $81.80.
The slump in oil and liquefied natural gas prices and the prospect of nuclear reactors restarting in Japan is undermining demand for coal.
Glencore said it would trim Australian production and consider shutting South African sites amid a global glut estimated by Credit Suisse to be 38 million tons this year, or about 4 percent of global trade.
“With oil and gas prices falling drastically, the competitiveness of coal is being whittled away,” Daniel Hynes, a senior commodity strategist at Australia & New Zealand Banking Group in Sydney, said. “That’s certainly going to play a part in discussions this time.”
The price Japan’s utilities negotiate with Glencore is used as a benchmark for accords across Asia, and is typically settled at a premium to spot coal, which ended 2014 at $64.81 a ton after sliding 25 percent over the year.
Spot prices closed at $60.56 last week, after climbing as high as $73.70 in February, Globalcoal data show.
Glencore planned to cut its Australian output this year by 15 million tons, equivalent to about 22 percent of its production from the country, after shutting its operations for a three-week period in December, it said on February 27. The Switzerland-based company’s Optimum Coal Mines unit might close some sites in South Africa, it said in January.
“We don’t want to be the guys creating too much supply in the market, that’s all it is,” chief executive Ivan Glasenberg said on a conference call this month when asked if the Australian cuts were linked to contract talks.
Japan’s utilities would be more inclined to agree to a higher price and potentially larger volume if they viewed supply security and quality to be at risk, Macquarie said in a note last week.
Glencore’s announcement to reduce Australian output had “brought this into focus,” the bank said. It raised its contract estimate by 9.4 percent to reflect “the successful strategic efforts of producers to play into the insecurities of Japanese buyers through potential for production cuts”.
Contract negotiations had started and the aim was to reach a settlement by the end of March, said Takashi Suzuki, a Sendai-based spokesman at Tohoku Electric Power, which is representing Japan’s power producers at the talks.
Francis de Rosa, a Glencore spokesman in Sydney, declined to comment on the discussions.
Japan increased buying of fossil fuels after the 2011 Fukushima disaster led to the shutting of the nation’s nuclear plants.