Solid Energy anxious as coal price dips

Solid Energy is watching anxiously as Japanese steel-makers shave 31 per cent off coal prices paid to small Australian mining companies in the first price agreements for this year.

Chief operating officer Barry Bragg said economic indicators had hinted at a price cut for more than two months.

While it was still early in the negotiations for their own sales to Japanese buyers, the size of the price drop in Australia was "concerning".

Bragg said the real market trend would be determined when the major Australian coal companies settled.

Solid Energy would take its lead from those negotiations, but was expecting a similar cut, if not quite as big as 31 per cent.

Record coal prices last year and a slight cooling in the market had combined to create the new price.

Analysts had predicted Australian contract prices for coking coal, used in steel production, would fall after rising 120 per cent last year.

The TEX Report - an unofficial mouthpiece of the Japanese steel industry - said some small Australian miners had signed deals to sell semi-soft coking coal to Japan for US$53 ($77) a tonne, down 31 per cent.

But the report said it was premature to think this would mark out the trend for other negotiations as agreements had not yet been reached with major suppliers such as Rio Tinto and Xstrata Coal.

UBS mining analysts said if these prices were indicative of the way negotiations were going it could affect Australian coal shares.

"If they were to translate through to benchmark settlements between the major coal producers and the steel mills it would be a negative outcome for the market as the prices being talked about are below our estimates and, we believe, market consensus," UBS said in a client note.

UBS had been forecasting a drop of 10 to 15 per cent for coking coal against a market consensus of a 20 per cent decline.

Solid Energy marketers will have a challenge on their hands getting a better price but they could be aided by a drop in the strength of the dollar in comparison to the yen.

"If the dollar stays around 70USc, it will be a problem but if it drops it will negate some of the price correction," Bragg said.

This year's coal price would have a bearing on decisions when the future of the Spring Creek, near Greymouth, mine was next analysed.

But Bragg said that had to be viewed in the context that Solid Energy's budget expectations were set over five-year periods, not annually.

The expected cuts after a trying year for the state-owned coal producer.

Solid Energy recorded a pre-tax profit of just $6.3 million for 2004-05, against $33 million the previous year.

Spring Creek had been forecast to produce 700,000 tonnes but only yielded 175,000 tonnes before extraction was suspended in November 2004.

Extraction at Spring Creek only resumed in August last year.

- NZPA