Glencore Coal Deal Collapse Shakes the Market
(Bloomberg) -- As the breakdown of Asia’s thermal coal pricing system leaves some buyers adrift without their traditional price signal, the experience of the iron ore market is seen as a possible way forward.
The recent failure by miner Glencore Plc and utility Tohoku Electric Power Co. to agree on a supply contract -- a regional benchmark -- has left some smaller buyers, including Japanese cement and paper manufacturers, without a price guide for their own negotiations, according to Glen Watkins, a commodities analyst with Idemitsu Australia Resources Pty Ltd. The talks collapsed as spot Newcastle coal traded at the highest quarterly average since 2012.
“Coal purchases for some of these companies can be small, less then 100,000 tons in some cases,” Brisbane-based Watkins said by email. “The smaller buyers will be wary of the big producers quoting them exorbitant prices knowing that they have little leverage.”
The demise of the decades-old system follows the fall of annual iron ore deals in 2010 and the end of met coal quarterly contracts last year. Future thermal pricing may follow that of iron ore, where miners now predominantly use monthly or quarterly average mechanisms, while selling a smaller proportion on the spot market, Hunter Hillcoat, an analyst at Investec Ltd. said in a June 21 note. Met coal producers have followed a similar structure, he said.
Tohoku ended contract negotiations with Glencore because there was a “gap on things including prices,” spokesman Yuta Oikawa said. The company hasn’t resumed talks and there is no set date to restart discussions, he said, adding Tohoku will hold talks with Glencore as needed. Glencore declined to comment.
The collapse of Glencore-Tohoku talks will have little impact on Electric Power Development Co., one of Japan’s major thermal coal users, according to spokesman Shingen Tsuneoka. The utility, known as J-Power, has been shifting toward index linked prices and holds negotiations with suppliers based on its own policy, he said, declining to elaborate. Shikoku Electric Power Co. and Chugoku Electric Power Co. also said there will be little impact.
Hokkaido Electric Power Co. said some of its coal supply contracts reference the benchmark price typically agreed to during the annual negotiations and the company will hold talks with suppliers on a solution.
Spot coal at the Australian port of Newcastle, a regional benchmark, averaged about $103 a ton during the second quarter, the highest in six years, according to data from Globalcoal. Prices closed Monday at $115. The failed settlement, which is predominantly used as a guide for buyers in Japan and Taiwan, was for annual supplies between April 2018 and March 2019.
While many Japanese companies’ supply deals rely on the Globalcoal index to some degree for pricing, switching all contracts to reflect that pricing structure may be difficult, Idemitsu’s Watkins said. As for following the path of iron ore miners, utilities are more limited in how quickly they can pass on higher input costs to customers, according to Investec.
“Steel mills have generally accepted quarterly prices based on a one-month lagged benchmark,” said Jeremy Sussman, an analyst at Clarksons Platou Securities Inc. “In my view, this would seem like a reasonable solution.”
©2018 Bloomberg L.P.