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Solid Energy expects returns to plummet

Tuesday 8th April 2003

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State-owned coal miner Solid Energy expects returns from coal sold to Japan, its biggest market, to plummet up to 20 percent this year.

Lower coal prices combined with the rising New Zealand dollar will probably wipe up to $NZ20 off last year's price of about $NZ100 a tonne and take a "fair swipe" at Solid Energy's bottom line, chief executive Don Elder said.

"It's going to impact on the second half and for next year, no doubt about that."

Solid Energy will receive about $US2 ($NZ3.74) less a tonne from Japanese buyers of its premium coking coals.

"The combination of the rise in the New Zealand dollar, and the $US2 fall, means we'll probably be getting between $NZ80 and $NZ90 a tonne this year," Dr Elder said.

Solid Energy recently reported a record half-year windfall profit of $NZ26.3 million, reflecting high international coal prices coinciding with a brief period of low New Zealand dollar exchange rate.

It warned then that coal prices had retreated and the kiwi dollar had climbed steeply against its US counterpart.

Solid Energy sells about one million tonnes, mostly coking coal, a year to Japan -- almost half its production. It has long-term supply contracts to Japan, but price is renegotiated each year.

The big Australian coal producers set the benchmark for Japan prices. Their 2003 coking coal prices have also been cut by about $US2 a tonne and steaming coal producers face a 7 percent price cut.

Dr Elder said a drop in Japanese prices inevitably meant a price fall in other world markets. The falls reflected demand and supply, he said. Australia increased its production when prices were good, leading to extra supply.

Weakness in the steel market has also created less demand for coking coal. Australian coal producers face the prospect of reducing production, but Dr Elder said that was not a consideration for Solid Energy at present.

"We still are selling at a positive margin. But if the New Zealand dollar continued to rise, if it hit US60c, and if the hard coking price or the thermal price continued to fall, we'd have to look at that again.

"It's not something we're actively looking at at the moment, except as a contingency for the future."

Solid Energy could swing its price by perhaps "a dollar or two" through negotiation, and by shifting coal in and out of different international markets.

"The price in Brazil, for instance, tends to be quite different to the price in Asia. But in the long term we don't have a lot in control."

Solid Energy sells some coal on the spot market. It aims to contract between 70 and 80 percent in advance, leaving up to 30 percent for spot sales.

"But it's a risky game for a business such as ours," Dr Elder said.

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