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Two Japanese electricity utilities sign 1m tonne US coal deal

21 Nov 2012 13:05:00 | csd

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Japanese electricity utilities Kansai Electric Power and Kyushu Electric Power have signed a 1m tonne supply agreement with US coal producer Oxbow, the two companies said in a statement on Wednesday.

Japanese utilities traditionally buy coal for power generation from Australian and Indonesian producers but the two utilities said they were diversifying their coal procurement to ensure the economic efficiency of their power generation and to improve the stability of their coal supply.

According to the statement, around 1m tonnes of coal will be delivered in a one-year period, with deliveries starting this month.

Japan is the main export market for high-quality 6,000kCal/kg NAR FOB Newcastle coal, with Japanese utilities securing around 80% of their coal needs through annual or long-term supply contracts at the hub.

For example, in September 2012, 54% (or 5.2m tonnes) of total Newcastle coal exports were dispatched to Japan, according to Newcastle port terminal operator Port Waratah Coal Services.

Last month, the 10 Japanese power utilities imported 4.36m tonnes of coal, in line with the five-year average calculated between 2007 and 2011, the Federation of Electric Power Companies of Japan said.

Australian price impact

Although FOB Newcastle contracts generally trade at higher price levels than their FOB RB equivalents, Japanese utilities have generally chosen security of supply over price.

Market participants have previously suggested there is less incentive for Australian coal producers to lower their price offers when global demand is low because the majority of their production is contracted into supply agreements with Japanese utilities.

However, if other Japanese utilities follow the example of Kansai Electric Power and Kyushu Electric Power, that could have an impact on FOB Newcastle price levels, some market participants said in the wake of Wednesday's announcement.

But others thought that the US coal was of lower quality than that purchased from Australia and would mainly displace lower-quality Indonesian coal.

"It sounds like they are aiming to replace Indonesian, rather than Australian, supply," one Singapore-based trader said. "I think they are either buying 4,900kCal/kg or 5,500kCal/kg coal from the [US] west coast."

According to information on the Oxbow website, the Florida-based company is the largest distributor of petroleum coke in the world. However, its Elk Creek mine annually produces around 5m tonnes of low-sulphur, high-energy-value coal, which it supplies to US power utilities.

The Elk Creek mine is in Colorado, which - according to traders - suggests that the calorific value of the coal sourced there would be below the 6,000kCal/kg NAR FOB Newcastle material.

"I assume they transport it via rail from Colorado to the ports in the Gulf of Mexico," one source said. "However, I would imagine that would be extremely expensive for Japanese utilities."

Low US natural gas prices have led to a significant fall in US domestic coal demand in the past year, with US producers looking to ship coal to Asia and other markets. MV

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