June 26, 2018 / 11:30 AM / in 2 months

UPDATE 1-Japan's Tohoku Elec, Glencore abandon April-March coal contract talks

* Breakdown of talks occurs for first time in decades -source

* Japan utilities try to cut cost amid electricity market shakeup

* Talks fail as coal prices soar to the highest since 2012 (Adds quotes and background)

By Yuka Obayashi and Aaron Sheldrick

TOKYO, June 26 (Reuters) - Japan’s Tohoku Electric Power Co Inc and Glencore Plc have abandoned talks on annual thermal coal supplies after failing to reach an agreement, the first time in decades the talks have broken down.

Tohoku Electric said on Tuesday that the negotiations with Glencore, the world’s biggest exporter of seaborne thermal coal, ended without an agreement after protracted negotiations on supplies from April 2018 to March 2019.

“We could not reach an agreement with Glencore on the April to March annual contract,” a spokesman for the Japanese utility company said, citing their inability to agree on terms such as price and volume.

“We will negotiate with Glencore for other contracts of coal as needed,” he said, adding that Tohoku has settled some annual contracts with other Australian suppliers.

A Glencore spokesman in Australia said no comment when contacted by Reuters.

But a senior Glencore official, who declined to be identified, said the talks failed because of price disagreements so they decided to skip this round and Tohoku has already covered its needs.

Multiple industry sources said the producer and the utility were not able to reach an agreement on pricing as Tohoku, like its peers, is seeking to cut costs amid increased competition in Japan’s electricity market.

Benchmark thermal coal prices also surged to their highest since 2012 while the negotiations were taking place, making the talks more complex, the sources said.

The price for thermal coal agreed to by Tohoku and Glencore is used as a benchmark for other Japanese utilities and manufacturers and the breakdown in talks surprised other coal buyers.

“This is the first time in my memory that the talks over an annual coal contract between a Japanese major utility and a key Australian supplier were broken off,” said a coal buyer with more than three decades of experience.

“The absence of the reference price means that other buyers will need to negotiate with their suppliers without any guidance,” a coal trader based in Tokyo said.

The April to March long-term contracts between Australian suppliers and Japanese utilities have traditionally accounted for a major part of Japan’s annual thermal coal imports of about 115 million tonnes. But the volume under the long-term contracts has been declining in recent years as utilities tried to diversify their sources, according to multiple industry sources.

Japanese utilities usually pay a premium to secure high-quality supplies from Australia on long-term contracts as they prefer coal with a higher energy content to generate electricity more efficiently and with less environmental harm. (Reporting by Yuka Obayashi and Aaron Sheldrick in TOKYO; Additional reporting by Melanie Burton in MELBOURNE; Editing by Clarence Fernandez and Christian Schmollinger)

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