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
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
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
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
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
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
"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.