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Indonesian high CV thermal coal still commands premium in Japan

Singapore — Indonesian high-grade thermal coal sold on term contract is still commanding a premium in Japan to Australian supply, even as more Japanese buyers tap the spot market for lower prices.

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Australian producers settled their annual contract with Japanese utilities starting April 1 at $67.80/mt FOB, basis 6,322 kcal/kg GAR, down about 17% year on year.

However, Indonesian high-grade thermal coal miners -- who produce 5,900 kcal/kg GAR coal and above -- are understood to have settled contracts with Japanese buyers at premiums of $4-$13/mt over the Japan-Australia contract price, sources said.

A major Indonesian producer was said to have entered into a term contract with Japanese buyers at about $72-$73/mt basis 6,322 kcal/kg GAR coal, an industry source said.


Another major Indonesian producer said his contract, which was signed before the Japanese-Australian negotiations were final, was settled at $77-$80/mt, basis 6,322 kcal/kg GAR.

He said the thermal coal he sells to Japan has a typical ash of about 8%-9% as received.

"We don't have fixed-price contract with Indonesian producers, but I also heard that some Japanese power utilities agreed to pay more than $70/mt FOB basis 6,322 kcal/kg GAR for Indonesian coal, including some sub-bituminous," said a Singapore-based trader who supplies to Japan.

Some of the Indonesian coal has lower ash content compared with Newcastle material and ash disposal cost is high in Japan, he said.

"So if you accept $67.80/mt for Australian coal, which I think is too much, then $70/mt for 6%-8% ash Indonesian coal is cheaper," he said.

Newcastle 6,300 kcal/kg GAR coal usually has about 14% ash on as-received basis, while Indonesian material of similar grade could generally have ash well below 10%, sources said.

A Japanese utility source said the price of $77-$80/mt FOB for Indonesian coal basis 6,322 kcal/kg GAR was "too expensive."

He said $60/mt FOB would be a more "acceptable price."

"We have been selling to Japan at a high price as our production is coming lower, particularly for the higher grade," the second Indonesian producer said.

"It's a situation where we ask the buyer either to take it or leave it as we won't produce if the buyer doesn't take it."

Another Singapore-based trader said Japanese utilities usually pay a premium for Indonesian thermal coal.

"Indonesian coal has freight advantage and Japanese utilities give premiums for lower ash as well," he said.

LIMITED AVAILABILITY

There are only a handful of Indonesian miners producing higher-grade coal, and they are all demanding prices much higher than the Japanese contract settlement price, the second Indonesian producer said.

Standard Chartered Bank analyst Serene Lim said Japan imported about 35 million mt of thermal coal from Indonesia in 2014.

In January to May, Japan has so far imported 13.5 million mt from Indonesia, which is down 6% year on year, she said.

Last year, Indonesian suppliers were reported to have settled contract prices with Japanese buyers at premiums of $3-$6 over the Japanese-Australian contract settlement price, sources said.

Earlier this year, mid-$70s/mt FOB basis 6,322 kcal/kg GAR coal was "acceptable," but with Indonesian production of higher-grade coal going lower this year, prices have risen to $78-$82/mt FOB, the second Indonesian producer said.

He said his company produced about 4 million mt/year of higher-grade coal two or three years ago but has lowered output to about 1 million mt this year. He expects many other producers of similar material to follow suit.

The producer expects Indonesia's total 2015 thermal coal production to be about 10% lower than its 2014 output of 420 million-425 million mt.

Pandu Sjahrir, chairman of the Indonesian Coal Mining Association, said at an industry gathering in June that weak coal prices are challenging the sustainability of many small and medium-sized miners.

He expects Indonesia to produce 350 million-400 million mt of thermal coal in 2015.

LOWER SPOT PRICES

An Indonesian producer of 6,500 kcal/kg GAR said he has secured a contract to supply about 500,000 mt to Japan so far this year and would only produce more coal when he receives fresh requirements.

"Japanese utilities consider offers in the low $70s/mt FOB basis 6,322 kcal/kg GAR coal as high currently," he said.

He heard that a Japanese utility bought through a tender Australian 6,322 kcal/kg GAR coal at around $58/mt FOB, while it procured similar grade from Indonesia at around $60/mt FOB given the comparatively lower freight rate from Indonesia to Japan.

Last week, Hokkaido Electric Power, Tokyo Electric Power and Chugoku Electric Power were reportedly seeking spot shipments of Newcastle 6,000 kcal/kg NAR thermal coal via tenders for late Q3 and Q4 delivery.

Another major Indonesian producer said more Japanese buyers are looking at procuring spot cargoes as they could find cheaper options.

"We are also offering 6,400 kcal/kg GAR coal at $63-$65/mt FOB to Japanese buyers," he said, adding that Japanese buyers are now following the Newcastle 6,300 kcal/kg GAR thermal coal spot pricing than the Japanese financial year reference price.

Platts assessed the daily 90-day price of Newcastle 6,300 kcal/kg GAR coal at $59.35/mt FOB Monday.

The producer said Indonesian higher grade coal accounts for roughly about 25% of the total production and that seems to be diminishing each year.

"This year we are only producing about 1.9 million mt of high-grade coal, compared with our total production target of about 70 million mt," he said, citing weak prices.

The 90-day price of FOB Kalimantan 5,900 kcal/kg GAR coal has averaged about $55.17/mt in the second quarter, down about 7% from Q1, Platts data showed.

--Deepak Kannan, deepak.kannan@platts.com
--Mia Corazon Aureus, mia.corazon.aureus@platts.com
--Edited by Meghan Gordon, meghan.gordon@platts.com