According to reports from various industry sources to the research division of the investment bank, there has been substantial growth in the price difference between premium thermal coal and lesser quality or off-specification product.

While noting the thermal seaborne coal market appears to currently be in oversupply, yesterday Macquarie said spot prices were likely to face more downward pressure in the short term so contract prices may not settle above the Newcastle spot price of about $US76/t (price for the period of first quarter 2009 so far).

However, Macquarie said there was a stark price difference between what Japan will pay for thermal coal compared to the other export markets, especially last year, with Japan settling contracts at $US125/t compared to “astute buying” from Korean power companies which locked in large volumes at $US65/t.

Even over time Macquarie said the Japanese premium over other Australian export destinations stretched to 17% in 2006 and 2007 compared to an average of 6% higher for the preceding decade.

While acknowledging there were various factors at play, Macquarie said Japanese power utilities generally have the narrowest quality ranges they can use and also seek to ensure supply security, meaning reliable suppliers with flexible shipping schedules.

Japan’s need for quality thermal coal, and the bank’s understanding that a large volume of off-specification material has come to the market during the second half of last year and the current quarter, has Macquarie expecting Japanese power utility contracts to be at a higher premium to spot prices.

“There will be a clear distinction between the premium contract market and the spot or generic market,” the bank said in its commodity report.

“Thus, while there appears ample thermal coal supply at present, the higher-quality market is said still to be tight, particularly for the first quarter of 2009.

“In this context, Australian exporters are expecting to realise Japanese contract prices at a significant premium – around $US5-10 per tonne – to spot prices.”

The bank added the premium obtained is likely to be at the lower end of this range as higher quality material should become more available as semi-soft coking coal production slows and the queue at Newcastle declines to a forecast 14 vessels by the end of the month compared to 47 on December 21.

The potential for higher upside has not been ruled out, with Macquarie noting the October Japanese power utility contracts were reported above $US130/t when the spot price was falling below $US120/t.

Macquarie said the current Japanese financial year contract price of $US125/t was settled when the spot price was at $US110-115/t.

Fixed export contract negotiations will start in the next couple of months as the Japanese financial year ends March 31.