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% 
 
¶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