April 1, 2011 / 12:19 AM / 7 years ago

UPDATE 2-Xstrata, Chugoku agree on record coal price for 2011

* Settlement price just under $130 per tonne

* Japanese utilities prioritise stability after quake (Adds analyst quotes, market reaction)

By Rebekah Kebede

PERTH, April 1 (Reuters) - Xstrata and Chugoku Electric have settled an annual coal contract for the Japanese fiscal year starting April 1 at a record level despite the near-term thermal coal demand destruction caused by the deadly earthquake in Japan last month.

The contract was settled just under $130 per tonne, over 30 percent higher than last year’s contract, sources told Reuters on Friday.

The settlement price exceeds the 2008 record of $125 per tonne, and is in line with expectations for a higher settlement price due to weather-related production difficulties in Australia.

“It’s the first of April now, it’s extraordinarily rare in thermal trade for negotiations to carry on into the period that they relate to, so I reckon they just came together and said it was $130 per tonne before the quake, that’s a fair price,” Tom Price, an analyst with UBS in Sydney said.

The Newcastle index closed at $129.87 the day before the earthquake, but the settlement price is nearly $10 above the current globalCOAL index for Australia’s Newcastle coal, the benchmark for Asian prices, which closed at $120.84 for the week to date on Thursday.

“Prices are a bit lower right now because there’s a lot of stranded cargoes around Asia that were supposed to deliver into Japan. Once that trade clears, the producers will make sure that the price lifts again to about that level,” Price said.

The negotiations between Xstrata, the world’s largest exporter of power-station coal, and Japanese utilities were delayed after a deadly quake hit Japan last month and talks resumed last week.

Japan’s annual contracts are generally around spot price levels, often with a supply security premium, which analysts and trade sources said Japanese utilities may have been more willing to accept as they struggle to recover from the quake.

But some market watchers said the price does not fully take into account the downside potential of the earthquake, which forced major utilities Tokyo Electric Power Co (TEPCO) and Tohoku Electric Power Co Inc to declare force majeure on some coal deliveries after the quake due to power plant outages and damaged ports.

Tohoku, which was expected to be the lead negotiator for Japanese utilities this year, was replaced by Chugoku Electric Power in the negotiations.

“I think they (settled at $130 per tonne) because of the Japanese desire for stability more than anything else. It’s a great outcome for Xstrata at $130 per tonne,” said one trade source based in Sydney.

“Coal consumption is going to be down because of the power plants that have been knocked out by the quake and the tsunami, it’s going to take a lot longer to put them back online than people are predicting,” the source said. (Reporting by Rebekah Kebede; Editing by Balazs Koranyi)

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