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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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This Big Coal Buyer Could Drive Coal Prices Even Lower

The coal market is in a dark place. With a 10 percent slide in prices during the last few months of 2015 having this week triggered the bankruptcy of America’s second-largest miner, Arch Coal.

And it appears some of the world’s biggest insiders in the business think the market could go even lower.

That was the message coming out of Japan this week. Where Platts reports that major coal buyer Tokyo Electric Power Co. (Tepco) has decided to keep its options open on pricing supply for the coming year.

Sources said that Tepco has opted for floating price contracts with Australian thermal coal suppliers for 2016. A departure from the firm’s usual buying strategy of locking in term contracts at fixed prices. Related: Successful Cyber Attack Ukraine Raises Fears Of Further Threats

Tepco will reportedly buy coal based on prices for globalCOAL’s floating index for Newcastle 6,000 kcal/kg NAR thermal coal. Signaling that Japanese buyers see prices possibly going lower this year — and want to keep their options open in case there’s an opportunity to buy cheap.

This is the second year in a row that Tepco has gone away from fixed coal contracts. Which were standard back when coal prices were rising (or threatening to) and buyers wanted to lock in term prices to avoid unexpected hikes.

Tepco’s buying represents a significant chunk of overall Japanese demand — with the company’s annual consumption pegged at 17 to 18 million tonnes. Showing that the firm is little concerned about buying big volumes in the spot market, and getting a good price doing it. Related: $20 Oil Is Now A Distinct Possibility As Chinese Demand Wanes

It’s not definitive, and even experts can be wrong. But the message is, the closest observers in the coal space see no reason to lock in prices even at today’s depressed levels.

Watch for other supply deals for the coming year, to see if similar terms are executed — and keep an eye on coal prices themselves to see if more downside lies ahead.

Here’s to buying low and buying lower

By Dave Forest

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