Asia Coal-Thermal coal bearish short-term on Japan quake

Thu Mar 17, 2011 6:04am EDT

Related Topics

* Ships turn back from damaged ports, shut plants

* Japan utilities look to swap some cargoes

* Annual thermal contract negotiations delayed

By Rebekah Kebede

PERTH, March 16(Reuters) - Australia's thermal coal prices, a benchmark for Asia, slipped this week as demand in quake-hit Japan tumbled for the short-term, with many coal-fired plants shut and vessels unable to discharge coal at some ports.

Thermal coal on the globalCOAL Newcastle index for the week to date was $125.79 per tonne on Wednesday, down from $130.33 a week earlier.

"We can expect a drop-down in the front-delivery, but longer-term deliveries will be very strong due to recovery period," one Sydney-based trader said, but added that in the near-term, the market has been plagued by uncertainty.

"We still don't know what the aftermath of the earthquake is, it's very difficult to predict what the final impact of the earthquake will be."

On the global coal index, closing prices through the end of the second quarter were flat to lower, with coal for delivery in the third quarter of 2011 and later posting gains.

Two of Japan's largest utilities, Tokyo Electric Power (TEPCO) and Tohoku Electric declared force majeure on some coal deliveries due to shut power plants and damaged port facilities, with other utilities also expected to declare force majeure as well.

With some Japanese-bound vessels unable to discharge coal, traders and brokers said utilities were still trying to fix destinations for the spare supplies.

Utilities were exploring several options including splitting some of the cargoes for delivery and carrying over the tonnage to the next quarter, said one trader with direct knowledge of vessel re-routing due to the quake.

Traders also said utilities were attempting to swap cargoes for immediate delivery for other parcels with later delivery with both local and foreign utilities.

Korea South-East Power Co Ltd (KOSEP) was considering taking 70,000 tonnes of Canadian thermal coal for late-March arrival, as Japanese utility J-Power was unable to use it after Japan's quake and tsunami.

In the long-term, demand from Japan is likely to climb with some of the nuclear capacity taken offline by the deadly quake unlikely to return soon, or not at all, in the case of the most severely damaged plant that is on the verge of a meltdown.

Analysts at Societe Generale said this week that if the nuclear capacity currently offline stays offline for the rest of 2011, Japan would need an additional 7 million tonnes to 8 million tonnes before the end of 2011 and a permanent 3 million tonnes from 2012 onwards.

Several countries, including Russia and Indonesia, have said they could increase coal supplies to Japan if they are needed.

Japan's quake could also impact demand for coal in China, the world's largest consumer of coal, if China's exports to Japan drop significantly causing industrial power demand to decrease, some analysts said.

ANNUAL CONTRACT TALKS STALLED

Japan's annual thermal coal contract talks for coal will be delayed as producers and buyers assess the situation, traders said.

The world's top thermal coal supplier Xstrata had been scheduled to meet with major Japanese utilities this week, but the negotiations are now likely to drag on for a few more weeks.

Analysts at UBS said earlier this week they are forecasting $130 per tonne, FOB, for the annual contract.

Prior to the earthquake, traders and brokers had reported that Japanese buyers were offering $130 per tonne, with Xstrata countering with $140 a tonne.

WEEK AHEAD

All eyes in the market will likely be on Japan -- traders and analysts have both said it was too early to tell the extent of the damage at coal-fired plants or how soon they may be able to return to normal.

The market will be watching for signals on when Japan's coal demand will begin to recover from the quake and how much coal demand could increase during recovery.

Global sentiment on nuclear energy will also be a focus -- following the quake, several European governments have sent signals that they may reconsider their policies, a development that could increase demand for coal. (Reporting by Rebekah Kebede)

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