The parties began discussions recently over what is expected to be a tough set of negotiations for annual term supplies of high-calorific value (CV) GAR 6,322 kcal/kg Australian coal from October 2019 to end-September 2020. Glencore is thought to have tabled an initial offer at $80/t before lowering its price idea to the $72-75/t range, market participants said.
The lead negotiator for the Japanese utilities, Tohoku, has signalled that it wants to settle at a price well below $70/t, but has kept its exact price idea under wraps, several market sources said.
The new agreement will set the reference price for term supplies starting from October and will be watched closely by other Australian producers and Japanese utilities, some of which may conduct their own negotiations with an eye on the Glencore-Tohoku outcome.
But this time round, Australian producers are facing stiffer competition in Asia from increasing Russian availability of high-CV coal, partly because of expanding exports from Russia's far east ports and a steep fall in European demand in 2019. Coal prices have also been weakened across the board this year by a recovery in nuclear output in northeast Asia, uncertainty about China's seaborne demand requirement for the rest of this year and lower gas prices.
The last round of Glencore-Tohoku negotiations for October-starting term supplies was settled relatively quickly at a fixed price of $109.77/t for the premium GAR 6,322 kcal/kg Australian coal, which was the highest-priced term contract between the companies since July 2013.
The talks were also concluded relatively quickly for this year's April-starting negotiations, which were settled at a fixed price of $94.75/t fob Newcastle.
But prices have fallen significantly since then amid a global oversupply of high-CV coal and generally lacklustre demand from well-stocked Japanese buyers. Nuclear generation has recovered to some degree in Japan, displacing thermal coal demand, and several utilities have also been shut for maintenance or repairs in recent months.
Argus assessed the NAR 6,000 kcal/kg price last week at $63.19/t fob Newcastle, which was up by $2.35/t on the week.
Weaker demand led Japan's coal imports to fall to 53.93mn t in the first half of 2019, down from 55.15mn t during the same period of last year. But Japan's thermal generation likely started to recover in August and could be poised to strengthen further amid upcoming maintenance restrictions on nuclear reactors, Argus analysis suggests.
The negotiations for October-starting annual supplies from Glencore usually cover a smaller amount of coal than the other set of negotiations covering April-starting annual term supplies. But the parties do not usually comment on the negotiations, or disclose the volume of coal covered by the agreements.
The majority of Japanese buying of Glencore's Australian coal used to be done at a fixed, term price settled during annual negotiations. But since 2015 Japanese buyers have started to rely more on sales linked to price indexes, spot tenders or bilateral trade. Deregulation of the power sector in Japan has also started to encourage Japanese buyers to be more competitive and some have been experimenting with a wider range of coals from different origins.
Some market participants expect Japanese buying of high-CV, competitively priced Russian coal to increase over time, although Japanese buyers are also wary of being too exposed to Russia, traders said. Some Japanese buyers have experimented with Colombian high-CV coal successfully this year, but higher freight rates have often placed long-haul Colombian coal at a disadvantage to coal from Russia's eastern ports.