Thermal coal standoff a blow to Newcastle?

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The FT is reporting that thermal coal is caught in price standoff between Xstrata and Japanese utilities that is reminiscent of that which broke the iron ore contract system several years ago (non that there is any thought of that in the coal market):

The rare stand-off comes amid a relatively well balanced seaborne thermal coal market. On the consumption side, Chinese demand remains strong, and India is importing more and more coal, traders say. But supply is also robust, particularly as US utilities burn more natural gas after the shale revolution sent its price sharply lower. The coal-to-gas shift is pushing huge volumes of US coal into the international market, just as Indonesian production also surges.

…So far, neither the miners nor the utilities are moving from their early negotiating positions of $102 and $94 a tonne, respectively. “We are in an impasse,” said an executive directly involved in the annual negotiations. The utilities, nonetheless, are hinting that if a deal does not arrive soon, they could lower their offers.

If the Japanese side wins the battle, as some miners fear, the settlement could be as low as $94 a tonne, down roughly 18 per cent from the 2012-13 deal of $115.20 and even further below the record high of $129.85 a tonne set in the 2011-12 fiscal year for benchmark material with an energy content of 6,700 kcal/kg.

…Coal executives are worried that a double-digit settlement, rather than one at what they call the “magic” $100 a tonne level, could put many high-cost mines in Australia out of business. At current spot prices of about $90 a tonne in Newcastle, the Australian port that serves as the benchmark for Asia coal, executives believe that up to a quarter of Australian miners would lose money. In its annual report, Glencore, by far the world’s top coal trader, said: “Current spot coal prices mean that many of the world’s producers are unable to make a reasonable return.”

BREE projects thermal coal exports of around $13 billion this year with big volume expansions to increase that to $23 billion in 2017-18 without hitting price:

thermal coal

I beginning to wonder if we won’t rather see a bust, costs fall, and then volume expansion on more efficient mines.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.