Identifier
Created
Classification
Origin
09CANBERRA250
2009-03-13 06:24:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Canberra
Cable title:  

Australian thermal coal contract prices fall 44%

Tags:  EFIN ETRD ECON AS 
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VZCZCXRO8355
RR RUEHPT
DE RUEHBY #0250/01 0720624
ZNR UUUUU ZZH
R 130624Z MAR 09
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC 1198
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHDN/AMCONSUL SYDNEY 4348
RUEHBN/AMCONSUL MELBOURNE 6134
RUEHPT/AMCONSUL PERTH 4397
RUEHWL/AMEMBASSY WELLINGTON 5676
UNCLAS SECTION 01 OF 02 CANBERRA 000250 

SENSITIVE
SIPDIS

STATE FOR EAP/ANP; STATE PLEASE PASS USTR

TAGS: EFIN ETRD ECON AS

SUBJECT: Australian thermal coal contract prices fall 44%

UNCLAS SECTION 01 OF 02 CANBERRA 000250

SENSITIVE
SIPDIS

STATE FOR EAP/ANP; STATE PLEASE PASS USTR

TAGS: EFIN ETRD ECON AS

SUBJECT: Australian thermal coal contract prices fall 44%


1. (SBU) Summary. Australia's leading thermal coal exporters have
signed a key benchmark contract agreement with Japanese buyers for
the country's third most valuable commodity export (after iron ore
and coking coal). The deal means export values will fall around $3.2
billion ($A5 billion),approximately 0.5% of GDP. Given the global
economic crisis and lower spot prices, producers are reportedly
relieved the price cut of 44% was not deeper, as reflected in a lift
in their share prices. End Summary.

THE NEW BENCHMARK PRICE


2. (SBU) The majority of Australia's thermal coal trade is conducted
on a contract basis. Traditionally the benchmark contract price is
set by the first major Japanese utility to come to agreement with
its suppliers. Chubu Electric announced March 7 that it had reached
agreement with suppliers to purchase coal at $70-72 per ton. Market
observers expect this to be the new benchmark price for the coming
Japanese fiscal year that begins April 1. The new price represents
a 44% fall from the previous year, but is still the second highest
price recorded and 25% above the 2007-08 price of $55.65. Notably,
back in 2003-04, the contract price was only $US26.80. Lower world
demand has forced prices down (as shown by the shrinking queues of
ships at Newcastle, down from 70 in early 2008 to around 15
currently). Thermal coal is Australia's third largest commodity
export (after coking coal and iron ore) and the most valuable export
for NSW. Export earnings are forecast to fall by 28% to $A13.2
billion (down from $A18.5 billion in 2008-09) as higher export
volumes are offset by lower $US contract prices - although the
depreciation of the $A is shielding producers from the full price
decline. The price fall could push Australia into a trade deficit.


3. (SBU) Xstrata and Rio Tinto collectively produce over half of
Australia's annual exports of 130 million tonnes of thermal coal.
Chubu Electric is Japan's third largest coal buyer by volume at 10
million tonnes a year. Its term prices for Australian thermal coal
are used as a benchmark by other Japanese electricity utilities and
large buyers in the Asia Pacific region. Japanese utilities
typically pay higher prices than on the spot market (currently
around $US60 a tonne for thermal coal) for their term coal supplies

to ensure high quality and stable delivery. The cut in thermal
prices appears reasonable as crude oil prices have fallen 55% since

2008. A stronger yen also helped Chubu accept the prices due to
lower yen-term costs. Analysts at Citi believe a price of around
$US70 a tonne will provide exporters with a reasonable margin as
they expect production costs will fall by 10% this year to $US30 a
tonne, due to lower mining costs and exchange rate changes. The
share prices of Rio Tinto and Xstrata rose after the new contract
price was announced. The price is slightly below that forecast by
ABARE last week, when it estimated that thermal coal revenue could
decline 28% to $A13.2 billion in 2009-10 from $A18.5 billion in
2008-09. Notably, ABARE has forecast a $US100 a tonne price for
thermal coal in 2010-11.

MARKET PERSPECTIVES


4. (SBU) Japan is by far the leading buyer of Australian thermal
coal, followed by Korea (China accounts for only 1% of exports as it
has sufficient domestic reserves). In Japan, one third of thermal
coal is used to generate power for heavy industry, with the rest for
Qcoal is used to generate power for heavy industry, with the rest for
residential and commercial electricity users. Hence, the 30% decline
in Japanese industrial output in early 2009 will cut demand for
thermal coal volumes by at least 10%. Outside of heavy industry,
there demand for electricity and base load requirements for
coal-fired power are relatively high and stable even in a global
downturn. Growth in thermal coal demand in Japan is projected by
ABARE to decline by an average of 1% a year over the outlook period
to reach 127 million tonnes in 2014. Japan's coal-fired power
stations operated at capacity in 2008 but thermal coal-fired power
generation is forecast to decline in the medium term owing to
policies aimed at reducing carbon emissions.


5. (SBU) Outside Japan, the outlook for thermal coal exports is more
promising. Global thermal coal imports are projected by ABARE to
increase at 2.5% a year to 832 million tonnes toward 2014. Thermal
coal is preferred as a fuel in developing Asia because of its low
cost and reliability of supply. Rising electricity demand in
developing Asia will be a key driver of thermal coal imports. In
these economies, energy demand growth typically exceeds growth in
real GDP as the use of electricity expands and consumers begin to
purchase energy consuming products. China, India and Vietnam are
investing heavily in new coal-fired power generation capacity to
meet growing demand. ABARE forecasts continued growth in China's
imports of thermal coal, at an average annual rate of 12% a year to
65 million tonnes in 2014 (as the local industry shrinks and

CANBERRA 00000250 002 OF 002


consolidates). There are extensive plans for the expansion of
coal-fired electricity generation capacity in Asia (580 gigawatts by
2030 according to ABARE). If only 20% of these plants come on stream
they would require an extra 340 million tonnes of coal annually.


6. (SBU) Comment: Thermal coal and coking coal supply different
markets as thermal coal is only used for power generation, while
coking coal is used for steel production. The stable demand for
thermal coal contrasts with the sudden collapse of world steel
demand in 200, with production 40% down in Europe and a 30% decline
in Japan and Korea). Coal producers expect more significant price
cuts for coking coal vis-`-vis those achieved by thermal coal
exporters (currently negotiators are expecting a 50 to 60% drop for
coking coal). End comment.

CLUNE