In early May, the Japanese utilities lead negotiator Chubu Electric and the major Australian steam coal exporters finally settled the reference price for JFY 2002 at US$31.85/t FOB Newcastle (basis 6,700 kcal/kg air dried), down 7.68% from the JFY

2001 level of US$34.50/t. This was the first time in the history of annual Japan – Australia contract negotiations that steam coal had been settled before hard coking coal.

But then, in mid May, the Japanese trade publication The Tex Report reported that Tohoku Electric, which had been carrying out its own negotiations in parallel with those of Chubu, settled with an Australian supplier on 17 May at a price “at the middle of US$28 FOBT mark” – i.e. around US$28.50/t.

In JFY 2001 the discount from the reference price to the actual average contract price was US$2.25 per tonne. So the ‘real’ price last year was US$34.50 – US$2.25 = US$32.25. The reported Tohoku price for JFY 2002 of around US$28.50/t would therefore represent a fall of some US$3.80/t (12%) from the ‘real’ price last year.

About the best we can say at the moment is that the true price movement will lie somewhere between the 7.7% fall in the reference price and the 12% fall implied for the Tohoku price. The reason for this lack of precision is twofold.

Firstly, only a small proportion of annually priced long-term contracts between the Japanese utilities and Australian suppliers have yet been settled. So the final average ‘true’ pricing level is unknowable at this stage.

Secondly, the basis of the reported Tohoku price remains unclear, with producers claiming it may relate to a low ‘tier’ in the tiered pricing structure (with lower pricing applied to each successive incremental step in tonnage) or to a low price negotiated with a supplier seeking to boost its tonnage. In other words the ca. US$28.50/t figure may be a selected price released by Tohoku to exert further pressure on ongoing negotiations, rather than a truly representative price.

It is, of course, in the producer’s interest to take this line, but it is fair to say that doubt remains over the exact nature of the Tohoku number. At least one Australian supplier has an annual contract with Tohoku for this year at above US$28.50/t FOB, despite reports to the contrary elsewhere. Prices on long-term contracts would generally be expected to be above those of annual contracts.

With regard to Chubu’s contracts it appears that the US$2.25/t discount that was applied last year will remain the same this year, at least for some contracts settled early in May. But the continued fall in steam coal spot prices is placing growing negotiating power into the hands of the Japanese utilities. So contracts yet to be settled will likely end up at lower prices. Therefore Chubu will probably end up paying more on average for its coal than the other utilities, and the discount between the reference price and the average ‘true’ contract price across all the utilities will increase significantly from the JFY 2001 level of US$2.25.

Chubu has been placed in the unfortunate position of having to settle first in a falling market. It is therefore hard to see Chubu or any of the other utilities volunteering to negotiate a reference price next year. With Australian reference price negotiators also not keen to repeat this years experience the reference price system may finally be assigned to history.

Perhaps a better pointer as to the level of steam coal price cuts into Japan this year is the 8.6% fall across the board for Chinese brands. The Chinese settled in late May for all brands of steam coal exported to Japan under the Japan-China long-term trade agreement. With regard to steam coal spot prices, the slide has accelerated over the past month, with Richards Bay prices having fallen by 8% between mid-April and mid-May, taking the cumulative fall since June 2001 to 26%.

Turning to semi-soft coking coal, it appears that the settlement price for Yanzhou No.2 coal from China as slightly different than the US$32.93/t that we reported last month. The price was actually US$33/t FOB, down 5.7% on the previous year. The Yanzhou No. 2 settlement was of course the first major annual price settlement into Japan for any coal type. Settlement of Australian semi-soft followed soon after the settlement of the steam coal reference price. Australian semi-soft prices have also typically fallen by 5% - 6%, as have prices for low volatile PCI coal.

Hard coking coal settlements continue to take place in Europe, with both BHPB and MIM having completed annual arrangements with major European steel mills at prices in the US$48 to US$49/t FOB range. What this means is that the Japanese Steel Mills have all but lost their battle to achieve a more moderate price increase. The JSM has targeted Canadian producers in their negotiating strategy this year in the hope that a lower Canadian price settlement would flow through into Australian settlements.

The JSM has throttled back Canadian coking coal imports and driven up Canadian coking coal stocks. To date, however, Canadian coking coal exporters have not buckled under the pressure – instead making plans to cut back production. The last throw of the dice by the JSM in this regard will come in mid June, when both Fording and Teck Cominco will be in Japan for negotiations.

Canada was the obvious target for this ploy. Similar pressure could not be applied to Chinese hard coking coal exporters owing to their very tight domestic coking coal market. It is unlikely, anyhow, that Australian exporters would fall into line with a low Canadian settlement this year. In this market, BHPB has the power to be able to hold on for the same FOB prices into Japan that it has already achieved in Europe.

The JSM must see that the writing is on the wall soon, and will almost certainly settle in mid to late June. We consequently see no need to revise our long-standing forecast of a JFY 2002 price for Goonyella brand coal of US$48/t FOB, a 12% rise from US$42.75/t in JFY 2001.