Japanese 2011 coal contract seen climbing to record level - Reuters

PERTH/TOKYO, Feb 16 (Reuters) - Annual negotiations between Australian coal producers and Japanese utilities for thermal coal contracts starting April 1 are underway with the prices expected to meet or exceed record levels seen in 2008.

Prices are widely expected to match or exceed the 2008 record price of $125 per tonne due to upward pressure from floods in Australia's Queensland state as well as production disruptions elsewhere.

Trade sources said that the price is likely to settle between $125 and $130 per tonne. A new contract at $125 per tonne would represent an almost 30 percent increase from last year's contract. "We think there are enough reasons (for a higher coal contract settlement) -- Queensland, of course, the disruptions in South Africa and export issues in Indonesia," said David Brennan, an analyst with Daiwa Securities.

Flooding in Queensland lifted thermal coal prices to a high over $140 per tonne earlier this year and the globalCOAL index for Newcastle coal is still hovering around $125 per tonne,
about 35 percent higher than this time last year. Rain-related disruptions during the last months in other coal producing countries have also contributed to global supply tightness.

The annual contract prices are set by mining major Xstrata Coal , the world's largest exporter of power-station coal and large Japanese utilities including Tokyo Electric Power Co (TEPCO), Tohoku Electric Power Co Inc and Chubu Electric .

Forecasts for the contract price among coal analysts have varied widely, with Macquarie Research putting its forecast at $145 per tonne, while others put the price around the 2008 record of $125 per tonne.

The contracts, which represent the majority of coal imported into Japan are generally around spot price levels, often with a supply security premium. Some contracts, typically smaller volumes, are signed in July and October. Japanese utilities use about 50 million of thermal coal annually, with Australia supplying about 60 percent of its imports.

Japanese utilities may accept a price of $125 per tonne, but there's a feeling they do not want to pay higher than that, according to one Japanese coal trader. "There's a sense of resistance to ($125 per tonne) level for the buyers," one Japanese utility source said. "Of course, we
aim to keep it below that." Some market sources said the Queensland floods and recent
market tightness would bolster Xstrata's hand in the negotiations.

"This is coming at a very good time from Xstrata's point of view," said one Sydney-based trader, indicating that Xstrata may use some of its recent mine disruptions to negotiate for a
higher price. Xstrata recently declared force majeure on one of its thermal coal mines in Australia due to heavy rains; another of its thermal coal mines has been shut for weeks due to a
fire. "In the end, whoever holds the tonnage will have the final say," the Sydney based trader said.