By Fayen Wong
SHANGHAI Dec 20 Commodity trader Trafigura has launched arbitration proceedings against a unit of China Coal Group for reneging on a thermal coal contract, an official from the Chinese state-owned firm said on Thursday.
Trafigura is claiming losses of more than $20 million, two trade sources with knowledge of the matter said. The case will be held in the London International Court of Arbitration over the next few months and will be subject to English law.
"This is a trading dispute and the case is still ongoing," a China Coal spokesman said, without confirming the details of the case.
Trafigura declined to comment.
A swift drop of 20 percent in the price of Australian steam coal between April and July to around $85 a tonne, followed by a steady drop in domestic Chinese coal prices that made imports more expensive, prompted a string of contract defaults by Chinese buyers.
Trafigura's move is a rare case of a commodity firm taking a Chinese state-owned entity to court for defaults, and the progress of the case will be closely watched by global suppliers, many of whom have been badly burnt by China's errant trading behaviour.
In recent cases of defaults, as in early 2009 following the global financial crisis, many suppliers chose to renegotiate prices and reschedule deliveries to Chinese buyers instead of going to court because of the time and money involved in seeking legal redress.
Arbitration awards made in foreign courts can also be difficult to enforce in China, which means the process to get the compensation can be long and drawn out.
Sellers are also reluctant to sue major customers in China for fear of burning bridges and losing future market share in the world's top importing country, whose imports are expected surge 30 percent and top 200 million tonnes this year.
A WARNING TO OTHERS
The dispute arose around June, when a trading unit of China Coal, Guangzhou Zhong Mei Huanan Co, was unable to lift five cape-sized shipments, claiming that its Chinese buyer for the cargoes had walked out on the contract, one of the sources said.
"Trafigura is claiming losses in excess of $20 million," one source close to the dispute said.
The China Coal unit had agreed to buy six shipments at around $110 a tonne on a cost & freight (CFR) basis, one of the sources said. It later took one cargo but failed to take the rest.
The sources spoke on condition of anonymity because they were not allowed to discuss the case.
Trafigura's move to take legal action against Guangzhou Zhong Mei Huanan may be aimed at warning other Chinese buyers that reneging on contracts will come at a cost.
"For too long Chinese players have thought that they can get away scot-free with defaulting on contracts. But this time, some of the sellers have had enough and want to show this is not the way business is done," a veteran trader in Singapore said.
Trade sources said Trafigura had been hit by other defaults from a number of Chinese players, but it was not clear whether it had taken more parties to court.
In May, South Africa's Cerrejon sued privately owned trading firm Klandee for non-performance after the Singapore firm had to renege on its contract because its Chinese buyer defaulted.
China Coal and Trafigura could still settle the case out of court if international coal prices rise further, other industry participants said.
"If coal prices go higher, it might be easier for China Coal to take the shipments, because their losses would be significantly lessened," a Chinese trader said.
Benchmark Australian steam coal prices, with a heating value of 6,000 kcal/kg (NAR), have risen 10 percent since mid-November to around $92 a tonne this week.
In a sign that Chinese coal consumption remains weak, however, the domestic price of coal with a heating value of 5,500 kcal/kg (NAR) has fallen 10 yuan since the start of November to 635 yuan ($100) per tonne, at a time when prices tend to rise for winter.
Swiss trading house Vitol won an arbitration award of $70 million in 2011 in a dispute with Bhatia Coal India over a coal contract cancelled in 2009.