NEAT index shines spotlight on volatile seaborne thermal coal market for Japan, S Korea, Taiwan

Nearly 10 months on from its launch in January 2017 the North East Asia Thermal coal index, or NEAT daily price index for short, continues to go from strength to strength, bringing increasing transparency to spot prices in the Japan, South Korea and Taiwan markets.
Spot pricing is becoming increasingly important in the Japanese thermal coal market as the Chrysanthemum kingdom, as Japan is known, opens its domestic electricity market to competition and market forces.
The NEAT index has a role to play within this development, as it enables market participants to keep track on a daily basis of the delivered price for seaborne thermal coal shipped to power stations in Japan, South Korea and Taiwan.
As can be seen from the price graph below, NEAT prices have moved within a wide trading band over January-October from $75.20/mt CFR Japan in early June, to almost $100/mt in mid-September.

The basis for the NEAT price index is the S&P Global Platts Newcastle 5,500 kcal/kg NAR index, a daily assessed price with a deeply liquid underlying physical market which Platts has assessed for five years.
The methodology for the NEAT price allows for a range of seaborne-traded coal to be included in the daily index including Colombian, Indonesian and Russian, although Australia is the predominant origin for Northeast Asia.
The NEAT price assessment is normalized to Japan’s Kinuura port and includes Panamax vessel spot freight for the voyage from Newcastle, eastern Australia to Kinuura that is based on daily indicative freight prices from Platts freight market team.
Freight market prices on the Newcastle to Kinuura coal shipment route have exhibited extreme volatility this year to date, rising from $9/mt in early January to peak at $12.50/mt in late March, before sinking to just below $9/mt in June and soaring to a high of $13.25/mt in September.

Traditionally, Japan’s thermal coal market has been centered around fixed price term contracts which come up for negotiations at regular points in the calendar year.
There used to be four pricing points for Japanese supply contracts — January 1, April 1, July 1 and October 1 — but now the market is down to two — April and October — roughly six months apart.
The settlement of a benchmark price for Japanese contracts for October 2017-September 2018 is perhaps an opportune time to review the NEAT index as a valid alternative to fixed price negotiations.
At $94.75/mt FOB Newcastle, the price agreed between Japan’s Tohoku Electric Power and Australian coal producer Glencore for deliveries of the 6,000 kcal/kg NAR grade to Japan is effectively a rollover of the October 2016 benchmark, which also settled at $94.75/mt.
The October benchmark remains in force for all Australian coal deliveries made under the contract out to September 2018, covering roughly 3 million mt, though up to 10 million mt shipped to Japan could be priced on the back of the October benchmark, according to market sources.
A difficulty with fixed price yearly contracts is that they are unresponsive to fluctuating prices and changing market conditions as the year unfolds.
Also, with so much riding on a single fixed price, contract negotiations can become fractious and emotionally charged as so much is at stake for both buyers and sellers in terms of market risk.
This year’s October settlement overran its October 1 deadline by 10 days, and April’s benchmark price was similarly delayed, eventually being resolved more than a month late in May.
How much of a better outcome would it be for market participants if they hitched their supply contracts to a Japan delivered index like NEAT that follows the ups and downs of market prices?

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