Coal miners face a strong headwind: booming US natural gas production.

As miners and Asian utilities gather for secretive annual talks this month, industry executives expect a price settlement for the annual coal contracts at least 10 per cent below the record level of the 2011-12 contracts.

Xstrata and Chugoku Electric of Japan closed a deal last year at $130 a tonne for the 2011-12 fiscal year, up 32.6 per cent from $98 in 2010-11. The deal, which created a benchmark for the annual contracts in Asia, was above the previous peak set in 2008-09 of $125 a tonne.

Xstrata usually leads the negotiations with Japanese utilities for the Asian annual contracts, which run from April to March reflecting the Japanese fiscal year. Industry executives expect the miner to conclude a deal priced at about $115-$120 a tonne, slightly above current spot prices in the Australian port of Newcastle at just under $110 a tonne.

The expectation of lower prices is a setback for the world’s big producers, including Bumi of Indonesia, Xstrata, Anglo American, Rio Tinto and Jakarta-listed Adaro. It is negative, too, for commodities trading houses including Glencore and Noble Group of Hong Kong.

Yet, the negotiations do not point to a disaster.

Even if miners and utilities settle at $115 a tonne – the low end of the industry’s expectations – the price will be the third-highest for annual contracts. And the longer-term prospects for the commodity are still relatively good.

The expected drop in annual contract prices – which account for about one-third of the market but have a large influence through the year over the spot market – comes as US thermal coal producers dump tonnage into the international market that they cannot sell domestically as utilities switch to cheaper natural gas. The cost of US natural gas fell last month to a decade low of about $2.3 a million British thermal unit, down 85 per cent from an all-time high set in 2005. Low freight rates are helping US thermal coal producers to ship their commodity into the Asian market.

US central Appalachian thermal coal prices fell this week towards recent lows, with contracts for the second quarter at $58.5 a tonne.

At the same time, the Asia-Pacific thermal coal region is better supplied than last year, further damping sentiment. Industry executives say that supplies have surged as weather-related production problems in Australia largely end and Indonesian production improves against initial expectations.

The demand side is mixed. Japan imported less coal in 2011 than in the previous year as the earthquake damaged several coal-fired power plants. But utilities are hoping to restart some of the plants later this year, boosting demand. Moreover, all but two of Japan’s 54 nuclear reactors remain idle, boosting the need for thermal generation. China and India are also buying large amounts of thermal coal, although the year-on-year increase has cooled because of slower economic growth and, thus, demand for power.

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