Lack of Japan spot tenders for Australian thermal coal highlights price transparency issue

After an active December, Japanese buyers -- including power generators and industrial end-users -- have yet to launch any tenders for Australian thermal coal spot cargoes this month.

"There are no tenders from Japan," one market source said, adding that this is likely to remain the case for the entire month.

In previous years, Japanese buyers have issued many tenders in January and February for spot shipments of Australian thermal coal.

They had done so in order to determine the strength of offer prices from Australian coal producers in the lead up to annual price negotiations for cargo deliveries of 6,322 kcal/kg GAR thermal coal under term contracts for the Japanese financial year starting April 1.

This year, however, it's different for two reasons.

Firstly, sources said January's price-testing exercise has lost its relevance as Australian coal producers' responses to previous January tenders have been poor, with very few offers forthcoming.

Without seeing offer prices from Australian thermal coal shippers and testing them in a competitive tendering process, Japanese buyers have been unable to use tenders for transparency in the prevailing market value of the fuel.

HIGH PRICES

A second reason for the paucity of Japanese tenders this month is the persistently high price of Newcastle 6,000 kcal/kg NAR thermal coal, the spot-traded version of 6,322 kcal/kg GAR coal and the traditional feedstock for Japanese power plants.

This grade of Australian thermal coal has traded above $90/mt FOB Newcastle since mid-July 2017, according to S&P Global Platts prices.

High spot prices are holding cost-conscious Japanese thermal coal consumers back. Consequently, they have opted for extra volumes above their regular deliveries from term contracts at lower locked-in prices.

With activity low in the spot market for Newcastle 6,000 kcal/kg NAR thermal coal, it is difficult for market participants to discover authentic prices for this grade.

S&P Global Platts has presented a solution to this price discovery problem in its Northeast Asia Thermal Coal index, a daily price assessment for Japan, South Korea and Taiwan that was launched in January 2017 and is based on a specification of 5,750 kcal/kg NAR and 15% ash.

The NEAT index is derived from spot prices for Newcastle 5,500 kcal/kg NAR thermal coal, which is a more liquid market than that of Newcastle 6,000 kcal/kg NAR coal, and includes indicative Panamax vessel freight to reflect the landed cost of Australian shipments for Japan and South Korea.

The NEAT coal index touched a new high at the close of Asia trade Wednesday of $102.85/mt CFR Kinuura, Japan, and its lowest price to date was $75.40/mt in early June 2017.

APRIL PRICE TALKS

The price negotiations for the upcoming Japanese term contracts, which are effective from April 1, are set to begin in early February when Australian coal producers' marketing and sales teams visit Japan-based buyers to give their view on the market for the year ahead, and to explain their production plans in detail.

Japanese power utilities last year agreed to a headline price of $84.97/mt FOB Newcastle for the Japanese financial year April 2017-March 2018. This has been the highest annual contract price since $95/mt FOB Newcastle in April 2013.

Another market source said that it was possible that April's benchmark price for Japanese supply contracts could emerge at more than $100/mt FOB Newcastle, given the current market conditions.

An outcome at this level would be the highest price for Japanese April-year contracts since 2012 when it was concluded at $115.25/mt FOB Newcastle.

This source also said that if the price is concluded at $100/mt FOB for Newcastle thermal coal, it will be a "sweet spot" for incumbent producers as it will provide them with a good income but at the same time, the price will not be high enough to attract new entrants to the industry.