UPDATE 2-S.Korea utilities ink '09 coal price with China

* S.Korea to buy 3 mln tonnes of coal from China at $78.50/T

* Talks between individual power firms and miners ongoing

* Traders say agreed price reflective of strengthening market (Adds details, background)

PERTH, June 17 - South Korean utilities have agreed 2009 thermal coal contracts with three Chinese producers at about $78.50 a tonne, down more than 45 percent from a year ago but in line with asking prices from China, two utility sources said on Wednesday.

The agreement, which was signed on Tuesday, comes amid tightening supplies and a recent surge in Asian coal prices, which have jumped 18 percent since May to about $74 a tonne on the globalCOAL Newcastle index, after touching a four-month high of $77.19 last week.

The long-overdue settlement for contracts beginning from April may set the tone for negotiations between Japanese utilities and Chinese miners, which have also been locked in annual contract talks since early this year.

Two separate utility sources said the five power companies have agreed to buy a total of three million tonnes of thermal coal from China's Shenhua Energy Co <1088.HK>, China Coal Group <1898.HK><601898.SS> and Datong Coal Mine Group.

The headline price of $78.50 a tonne is based on coal with a heating value of 5,800 kcal/kg (NAR) and is significantly higher than the low-$60s range which South Korean utilities were seeking as early as last month. [ID:nSYD404272]

It is not immediately clear if the headline price includes China's 10 percent export tax, but traders and producers say the settlement price is reflective of a strengthening market.

"We've decided to settle with the Chinese because prices are now on an uptrend and there are also considerations that supplies may tighten in the third and fourth quarter, which could push prices higher," said the utility source who requested anonymity because he was not authorised to speak to the media.

Apart from the agreed 3 million tonnes, South Korea's five power companies -- Kosep, Kospo, Komipo, Kowepo and Kewespo -- are also individually negotiating with Chinese producers for additional tonnage, said one of the utility sources.

STRENGTHENING MARKET

Producers and traders say the agreed price between South Korean utilities and Chinese miners reinforce the view that the Asian thermal coal market has turned around and that prices are unlikely to fall back to the near two-year low below $60 struck in April this year.

"More importantly, the settlement shows that South Korean utilities are acknowledging that coal supplies will be tight in the second half and they won't be able to buy cheap coal through tenders," said a Sydney-based thermal coal trader.

Korea Midland Power Co (KOMIPO) agreed earlier in June to buy some 2009 coal tonnage with Xstrata <XTA.L> at about $63 a tonne -- after pressing for months for a discount of as much as $8. [ID:nSYD481039]

Utilities in South Korea, which are expected to import about 69 million tonnes of coal this year, have been actively seeking coal supplies through open tenders to take advantage of the price fluctuations on the globalCOAL Newcastle weekly index and as annual contract negotiations dragged on.

But with Chinese utilities having swooped in to buy as much as 23 million tonnes of coal from regional producers from January to April, a large portion of supplies from Australia and Indonesia are now already contracted, which means North Asian utilities are unlikely to be able to buy coal at a bargain.

"Most producers are very comfortable with their sales target for the rest of this year and no one seems to be worrying about large uncontracted volumes," said a Singapore-based trader.

"Supplies for the second half are now looking quite tight and prices may go higher should the economy picks up."