Thermal coal – JPU annual contract price settlement

l Global Research l
Commodity Alert | 13 March 2014
Thermal coal – JPU annual contract price settlement
 The premium of annual contract prices over current-quarter average spot prices has declined recently
 We believe this year’s premium will be squeezed, too, largely due to nuclear restarts
 The JPU price may be settled below USD 80/t for the first time since the October 2010 price settlement
Summary
We believe the next three weeks will be crucial for the thermal coal market, as it will
be time for Australian producers and Japanese power utilities (JPUs) to negotiate the
annual contract price for Newcastle 6,322 kcal/kg gross as received (GAR)
bituminous coal. Once the price has been settled, delivery will span 12 months,
beginning 1 April. The Newcastle price has historically been the leading benchmark
for setting contract prices in the Pacific region, and this event is therefore closely
watched annually.
Serene Shang Yi Lim +65 6596 6064
[email protected]
Annual contracts are usually priced at a premium over the current quarter’s average
globalCOAL Newcastle spot price. This premium reflects Japan’s strong commitment
to energy security but has been declining recently, having narrowed to USD 13/tonne (t) from USD 9/t in 2009. We therefore expect this year’s premium to remain
squeezed as well, owing to ongoing talks of restarting the country’s nuclear reactors.
Based on current market sentiment, we do not rule out the possibility that the JPU
price will be settled towards the lower end of the price range – below USD 80/t – for
the first time since the October 2010 price settlement.
Figure 1: Newcastle quarterly average spot prices vs. the JPU price settlement
over the 12-month delivery period
Premium of the JPU price settlement over the current quarter’s average spot prices,
USD/t
140
JPU settlement price
120
100
80
NEWC quarterly
average prices
60
Q4-2008
Q4-2009
Q4-2010
Q4-2011
Q4-2012
Q4-2013
Source: McCloskey, globalCOAL, Standard Chartered Research
Important disclosures can be found in the Disclosures Appendix
All rights reserved. Standard Chartered Bank 2014
research.standardchartered.com
Commodity Alert
The JPU annual contract negotiations are in progress
The outcome will determine contract prices in the region
We believe that all the coal Japan
imports from Australia is contracted
on a long-term basis with annual
pricing
The next three weeks will likely be crucial for the thermal coal market, as it will be
time for Australian producers and Japanese power utilities (JPUs) to negotiate the
annual contract price for Newcastle 6,322 kcal/kg GAR bituminous coal. Once the
price has been settled, delivery will span 12 months, beginning 1 April. The
Newcastle price has historically been the leading benchmark for setting contract
prices in the Pacific region, and this event is therefore closely watched annually.
Other fixed-term contract prices are typically at a discount or a premium to this JPU
contract price, depending on the quality of the coal against the Newcastle 6,322
kcal/kg GAR.
According to statistics from the Ministry of International Trade and Industry, Japan
imports thermal coal primarily from Australia (63%), Indonesia (26%) and Russia
(6%). Approximately 80% of Japan’s total thermal coal imports are on long-term
contracts. However, this percentage has declined in recent years due to the country’s
increased consumption of lower-calorific-value coal. We forecast that c.75% of
Japan’s future imports will be on long-term contracts, with the remainder on spot
purchases.
We believe that all the coal Japan imports from Australia is contracted on a long-term
basis with annual pricing, negotiated quarterly, with delivery spanning 12 months.
Such fixed-term contracts are usually negotiated in March (for delivery from April to
March the following year), June (for delivery from July to June), September (for
delivery from October to September) and December (for delivery from January to
December). Fixed-term contracts from April to March are particularly of interest, as
this period coincides with Japan’s fiscal year. We estimate that 70% of Japan’s fixedterm contracts with Australian producers are settled during this period. We forecast
that Japan imported 125 million tonnes (mt) of thermal coal in 2013, of which 113mt
was of higher calorific value (On the Ground, 29 January 2014, ‘Thermal coal –
Presenting our new global coal model’).
Annual contracts are usually priced at a premium
The premium has declined to USD
1-3/t in recent years from USD 9/t in
2009
Japan’s annual thermal coal contract prices are typically negotiated using the spot
Newcastle price in effect a month or two before the settlement date. These contracts
are usually priced at a premium over the current quarter’s average globalCOAL
Figure 2: Breakdown of coal exporters
Based on Japan’s thermal coal imports in 2013
Colombia
0%
South Africa
1%
USA
2%
Canada
2%
Russia
Indonesia
Japan’s fixed-term contracts:
% of Australia's exports to Japan
April-March delivery
70
July-June delivery
5
October-September delivery
20
January-December delivery
5
6%
26%
Australia
Source: McCloskey, METI Japan, Standard Chartered Research
13 March 2014
Figure 3: Japan-Australia annual volumes
63%
Source: Standard Chartered Research
2
Commodity Alert
Newcastle spot price. This premium reflects Japan’s strong commitment to energy
security but has been declining recently, having narrowed to USD 1-3/t from USD 9/t
in 2009. We believe this decline suggests several possibilities: Japan’s reduced
reliance on coal and increased dependence on other sources of energy, or the
country’s shifting from entering fixed-term contracts to buy higher-calorific-value coal
to entering spot contracts to buy lower-calorific-value coal.
Weekly globalCOAL Newcastle prices have averaged USD 79.70/t quarter-to-date. If
the price remains at the most recent level of USD 75/t over the course of March, this
quarter’s average price will be USD 78.60/t. Adding the historical premium of USD 13/t, the JPU contract settlement price would likely be in the range of USD 79.6081.60/t. Based on current market sentiment, we do not rule out the possibility that the
JPU price will be settled towards the lower end of this range – below USD 80/t – for
the first time since the October 2010 price settlement. Nonetheless, we think USD
80/t will be a strong support level.
Figure 4: Close relationship between Japan’s annual contract prices and prevailing spot Newcastle (NEWC) prices
Historical JPU contract prices, USD/t
Negotiation month
Delivery period
JPU contract settlement price
(USD/t)
Negotiation quarter
Average NEWC price in
negotiation quarter
Difference between JPU
price settlement and
current-quarter price
Dec-08
Jan-Dec 2009
81.5
Q4-2008
93.29
-11.79
Mar-09
Apr-Mar 2010
70.5
Q1-2009
73.77
-3.27
Jun-09
Jul-Jun 2010
75.5
Q2-2009
66.30
9.20
Sep-09
Oct-Sep 2010
75.0
Q3-2009
72.37
2.63
Dec-09
Jan-Dec 2010
85.0
Q4-2009
77.25
7.75
Mar-10
Apr-Mar 2011
97.8
Q1-2010
94.43
3.32
Jun-10
Jul-Jun 2011
103.0
Q2-2010
99.95
3.05
Sep-10
Oct-Sep 2011
97.7
Q3-2010
93.62
4.08
Dec-10
Jan-Dec 2011
115.0
Q4-2010
108.00
7.00
Mar-11
Apr-Mar 2012
129.9
Q1-2011
127.87
1.98
Jun-11
Jul-Jun 2012
127.5
Q2-2011
120.62
6.88
Sep-11
Oct-Sep 2012
126.5
Q3-2011
121.75
4.75
Dec-11
Jan-Dec 2012
115.5
Q4-2011
115.18
0.32
Mar-12
Apr-Mar 2013
114.2
Q1-2012
113.52
0.68
Jun-12
Jul-Jun 2013
95.0
Q2-2012
95.88
-0.88
Sep-12
Oct-Sep 2013
96.9
Q3-2012
89.99
6.91
Dec-12
Jan-Dec 2013
90.5
Q4-2012
87.31
3.19
Mar-13
Apr-Mar 2014
95.0
Q1-2013
93.03
1.97
Jun-13
Jul-Jun 2014
90.0
Q2-2013
86.06
3.89
Sep-13
Oct-Sep 2014
85.8
Q3-2013
78.03
7.77
Dec-13
Jan-Dec 2014
87.4
Q4-2013
83.98
3.42
Mar-14
Apr-Mar 2015
79-81.5
Q1-2014 *
79.70 *
Note: *Average NEWC price quarter to date (as of 7 March 2014)
Source: McCloskey, globalCOAL, Standard Chartered Research
13 March 2014
3
Commodity Alert
What does the reduced premium really imply?
We expect this year’s premium to
remain squeezed as well, owing to
ongoing talks of restarting the
country’s nuclear reactors
Prior to the Fukushima incident in March 2011, nuclear power generators provided
about 30% of Japan’s electricity requirement (or 46GW of installed output capacity),
and the government directed that this be increased to 50%. However, the incident led
to the closure of all nuclear power-generation plants by May 2012. The loss in
nuclear electricity generation was matched by an overall decline in electricity demand
and compensated for by additional supply of coal and natural gas power generation.
Liquefied natural gas (NG) consumption rose 38% in 2012, versus pre-Fukushima
2010 levels, while coal consumption was higher by 7%. All Japan’s 48 nuclear
reactors remain offline at present.
All coal-fired power plants affected by the Fukushima incident – including the 2GW
Hitachinaka plant – returned to full operation in 2013. By December 2013, two other
new coal-fired power plants (with total capacity of 1.6GW) commenced operation.
The main threat to Japan’s coal demand is a revival in nuclear power supply. Last
month, the Nuclear Regulation Authority (NRA) announced that it would fast-track the
restart of some nuclear reactors in order to lower the cost of importing fossil fuel to
meet the country’s electricity needs. The NRA also announced that eight Japanese
utilities have submitted proposals to restart 17 nuclear reactors.
Whether Japan’s nuclear reactors will eventually restart depends on the outcome of a
set of stringent safety tests and political issues. Many reactors are either decades-old
and need upgrading or a substantial overhaul, or are situated along potentially active
seismic faults. Hence, it will require time to bring these nuclear reactors back online.
The NRA has not provided a progress update on the safety assessments, and there
is widespread resistance among the Japanese people to restarting the reactors.
Before the Fukushima incident, more than 36GW of nuclear capacity was in
operation. We estimate that the difference between a complete shutdown of Japan’s
nuclear energy and reopening about 24 reactors (50% of the 48 reactors, or 23GW of
nuclear capacity) equals 12mt/year of coal demand. Coal demand increased by an
average of 4mt per annum in 2010 and 2012.
We therefore expect the premium of this year’s contract price over the spot
Newcastle price to remain squeezed. Also, the spot Newcastle market is not as
highly regarded now as it was previously. The recent emergence of newly
commissioned power utilities drives demand for lower-quality sub-bituminous coal,
and this has led to low liquidity and higher price volatility in the spot Newcastle
market. The shift away from the Newcastle price as a suitable benchmark makes us
wonder whether there will be any upside price bias to the spot Newcastle price.
However, the restart of nuclear reactors seems inevitable in the long run. The energy
policy committee at the Ministry of Economy, Trade and Industry noted in a report
released last December that nuclear power will continue to be Japan’s key source of
base power from the perspective of stable supply and costs.
We also do not rule out the possibility of a repeat of last year’s protracted
negotiations, when Australian producer Xstrata and Japanese utility Tokyo Electric
Power Company (TEPCO) failed to come to a settlement on the annual thermal coal
benchmark price until the end of April. This meant that the contract price of USD
114.2/t in 2012 was rolled over until a new price of USD 95/t was agreed on. This
hurt the Japanese utilities.
13 March 2014
4
Commodity Alert
Figure 5: Japan’s nuclear reactors
Eight Japanese utilities have submitted proposals to restart 17 nuclear reactors
No.
Company
Capacity (MW)
Unit start date
Remarks and application status
Hokkaido Electric Power Co.
Tomari
1
No.
1
579
Jun-89
Applied on 8 July 2013
2
No.
2
579
Apr-91
Applied on 8 July 2013
3
No.
3
912
Dec-09
Applied on 8 July 2013
Tohoku Electric Power Co.
Onagawa
4
No.
1
524
Jun-84
5
No.
2
825
Jul-95
6
No.
3
825
Jan-02
1,100
Dec-05
Applied on 27 December 2013
Higashidori
7
No.
1
Tokyo Electric Power Co.
Fukushima Dai-Ni
8
No.
1
1,100
Apr-82
9
No.
2
1,100
Feb-84
10
No.
3
1,100
Jun-85
11
No.
4
1,100
Aug-87
Kashiwazaki Kariwa
12
No.
1
1,100
Sep-85
13
No.
2
1,100
Sep-90
14
No.
3
1,100
Aug-93
15
No.
4
1,100
Aug-94
16
No.
5
1,100
Apr-90
17
No.
6
1,356
Nov-96
Applied on 27 September 2013
18
No.
7
1,356
Jul-97
Applied on 27 September 2013
Chubu Electric Power Co.
Hamaoka
19
No.
3
1,100
Aug-87
Plans to submit proposal in Q2-2014
20
No.
4
1,137
Sep-93
Applied on 14 February 2014
21
No.
5
1,380
Jan-05
Hokuriku Electric Power Co.
Shika
22
No.
1
540
Jul-93
23
No.
2
1,206
Mar-06
Kansai Electric Power Co.
Mihama
24
No.
1
340
Nov-70
May face difficulty in meeting the stringent safety guidelines*
25
No.
2
500
Jul-72
May face difficulty in meeting the stringent safety guidelines*
26
No.
3
826
Dec-76
May face difficulty in meeting the stringent safety guidelines*
Ohi
27
No.
1
1,175
Mar-79
May face difficulty in meeting the stringent safety guidelines*
28
No.
2
1,175
Dec-79
May face difficulty in meeting the stringent safety guidelines*
29
No.
3
1,180
Dec-91
Applied on 8 July 2013
30
No.
4
1,180
Feb-93
Applied on 8 July 2013
13 March 2014
5
Commodity Alert
No.
Company
Capacity (MW)
Unit start date
Remarks and application status
Takahama
31
No.
1
826
Nov-74
32
No.
2
826
Nov-75
33
No.
3
870
Jan-85
Applied on 8 July 2013
34
No.
4
870
Jun-85
Applied on 8 July 2013
Chugoku Electric Power Co.
Shimane
35
No.
1
460
Mar-74
May face difficulty in meeting the stringent safety guidelines*
36
No.
2
820
Feb-89
Applied on 25 December 2013
May face difficulty in meeting the stringent safety guidelines*
Shikoku Electric Power Co.
Ikata
37
No.
1
566
Sep-77
38
No.
2
566
Mar-82
39
No.
3
890
Dec-94
Applied on 8 July 2013
May face difficulty in meeting the stringent safety guidelines*
Kyushu Electric Power Co.
Genkai
40
No.
1
559
Oct-75
41
No.
2
559
Mar-81
42
No.
3
1,180
Mar-94
Applied on 12 July 2013
43
No.
4
1,180
Jul-97
Applied on 12 July 2013
44
No.
1
890
Jul-84
Applied on 8 July 2013
45
No.
2
890
Nov-85
Applied on 8 July 2013
Japan Atomic Power Co.
Tsuruga
46
No.
1
357
Mar-70
47
No.
2
1,160
Feb-87
1,100
Nov-78
Tokai Dai-Ni
48
No.
1
May face difficulty in meeting the stringent safety guidelines*
*According to Bloomberg and Asahi newspaper reports, citing a survey of nuclear plant operators
Source: Bloomberg, Asahi newspaper, Standard Chartered Research
13 March 2014
6
Commodity Alert
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