Perth (Platts)--14Mar2011/618 am EDT/1018 GMT

Thermal coal contract talks between Japanese buyers and Australian coal producers could be put on hold for several months as the country begins its recovery from the massive earthquake and tsunami that hit the country Friday.

"The main participants in the talks, Tohoku and Tepco, or Tokyo Electric Power Company, are going to lose 50% of their consumption for months. They would like to postpone the April year contract talks to at least the summer time [in the northern hemisphere]," said one market participant speaking from Japan over the telephone on Monday.

"The deadline for an agreement in the 2011 Japanese financial year talks is March 31. However, achieving this looks remote for this year's talks which have made slow progress to date," he added.

He went on to question the current spot price for Newcastle thermal coal at $130/mt FOB, given that many coal-fired power plants in Japan were out of action and likely to remain so for some months.

Offer prices for cargoes of FOB Newcastle thermal coal rose several dollars early in the Asian trading window Monday, with a June-delivery Newcastle cargo offered on globalCOAL at $131/mt FOB compared with $127/mt FOB for the same delivery period on Friday.

"On the Pacific side of Japan, which was hit by the tsunami, these power plants, as far as I know, will be out for maybe three or four months or possibly longer. One power station has two vessels grounded on its pier," the market participant said. "We are losing some coal-fired plants. I think it will be bearish for the market in the mid-term."

Japanese power utilities were likely to turn to LNG- and oil-fired power plants to fill the gap in generation left by outages at the nuclear plants.

Japan's 54 reactors at 18 plants host about 47,000 MW of operational capacity, although at any one time, several reactors are shut for scheduled or unplanned maintenance. The plants generated almost 30% of Japanese grid electricity supplies in 2010.

"There is no increase in demand for coal because in Japan there is limited capacity to transfer power from the western to the eastern side of the country. There could be one or two cargoes purchased, but the capacity to transfer power from the east to the west is very limited. It's about 1,000 MW," the market participant said.

A second market participant said he too thought that the 2011 Japan financial year negotiations would be postponed.

"I think the negotiations have been delayed, but I am not sure as to how long. Coal company representatives were due to arrive in Japan this week, though I expect their visit will be canceled," he stated.

Meanwhile, power cuts were being introduced in Japan to cope with its reduced capacity for power generation and the earthquake and tsunami had caused extensive damage to port facilities in the northeast of the country, he said.

"The northeast of Japan has lost one quarter of its power generation capacity. That part of the country is a disaster zone where it is almost impossible to unload coal from ships," he said.

If the earthquake and tsunami add up to a bearish scenario for Japanese thermal coal demand as market participants suggest, it places a large question mark over the fate of vessels carrying a total of 2 million mt of thermal coal said to be on their way to Japan from eastern Australia.

There might be a possibility of diverting some of these cargoes to other buyers in northeast Asia such as South Korea, Taiwan or possibly China, but these potential buyers would most likely expect prices for these cargoes to be heavily discounted.

Japan generates 50% of its electricity from coal-fired plants and imported 125 million mt of thermal coal last year, equivalent to 16% of the global seaborne market in thermal coal, according to analysts at the Royal Bank of Canada in Sydney, in a Monday research note.

"A substitution in source of power supply could see a lift in spot thermal coal prices; we also believe this event may place upward pressure on Japan financial year thermal coal contract negotiations depending on the duration that the nuclear plants are offline," said the RBC analysts, noting that Tepco had shut its Kashiwazaki nuclear plant for 21 months after an earthquake in 2007.

Tepco's 4.6 GW capacity Fukushima Daiichi nuclear power plant suffered problems at its reactor units after its cooling systems failed.

"We expect that a prolonged shutdown of the Fukushima Daiichi power station will increase import demand for fuel oil, coal and LNG, putting upward pressure on coal and gas prices," said analysts at Australia's Commonwealth Bank in a note to clients Monday.

The CBA analysts said it was difficult to judge the exact impact of the nuclear outage on demand for coal, LNG and fuel oil, however, they noted that the "Fukushima Daiichi nuclear power plant's capacity translates through to up to 14 million mt of thermal coal equivalent or about 1.5-2% of world trade per year."

--Mike Cooper, michael_cooper@platts.com

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