Japanese play hardball in Quintette coal row

While Quintette Coal has accused them of attempting to squirm out of long term contracts, a major Japanese steel manufacturer says it has no alternative but to take a pricing dispute involving Quintette and its Japanese buyers to arbitration.

The arbitration hearing follows 10 months of negotiations involving Quintette and two Japanese buyers with a 15-year contract to take 1.3 million tons annually from Quintette’s huge coal operation at Peace River, B.C.

During the negotiations, the Japanese have tried unsuccessfully to reduce the price they pay for Quintette’s metallurgical coal from $95 to the current market price of $57.85 per tonne.

But those discussions broke down two weeks ago amid a war of words involving Canada’s largest coal producer and its Japanese customers. “Faced with complete intransigence on the part of Quintette on the base price review issue, the buyers have no choice but to arbitrate,” said Mitsuo Hayashi, general manager of Nippon Kokan K.K.

“The buyers have also requested a decision on whether they have the right to terminate the coal purchase contracts,” said Hayashi, who has selected former Cominco Ltd. Chairman Norman Anderson to represent his company at the arbitration hearing. Pricing levels

If the Japanese are successful, it could spell the end for an operation which will struggle to remain financially viable, even if Quintette succeeds in maintaining its current pricing levels.

As reported (N.M., Nov 23/87) a revised development plan requires Quintette to produce five million tonnes annually at $104 per tonne during the next 12 years.

But since the company recently dropped its price by $8.50 per tonne and cut annual production by 650,000 tonnes, it expects to lose approximately $62 million in annual revenues.

“To suggest that Canadians would spend $2.5 billion on this project and accept the equivalent of $33 per tonne (based on a 1980 price tag of $75 per tonne) is not only an effrontery to the Canadian people but its just not reasonable,” said Quintette President Paul Kostuik in a telephone interview with The Northern Miner.

Although the Japanese have refused to elaborate on a rebuttal issued to the Canadian press last Friday, it was clearly aimed to match Kostuik’s hard line stance.

“We appreciate that Quintette’s fundamental problem is that its costs are among the highest in the world said,” said Hayashi. “Nevertheless, the Japanese buyers cannot accept the suggestion that they must continue paying a premium price, whatever that may be.” Mitsui Mining

One of Japan’s largest steel manufacturers, Nippon Kokan K.K. shares a 38% combined holding in Quintette with Mitsui Mining Co., Tokyo Boeki Ltd., and Sumitomo Corp.

Since an escalator mechanism contained in the contract has increased the price of Quintette coal from $75 in 1980 to $104 this year, Nippon Kokan says it is paying a $38 per tonne premium for Quintette coal based on a current world price of $58 per tonne.

Although a world glut of metallurgical and thermal coal may keep prices at the $60 per tonne level for an extended period, Nippon Kokan and a number of other Japanese steel buyers are tied to higher prices under long term contracts extending to March 31, 1998.

However, under a couple of base price clauses contained in the contract, both sides can renegotiate the price it pays or charges for Quintette coal to reflect market prices.

Under an inequity review clause allowing both parties to request a price review which takes into account the prices paid by Japanese buyers to other Canadian coal producers, Quintette had already dropped its price from $104 to $95.

That was agreed on to reflect the $92 per tonne (plus change) which Japanese steel producers pay for coal from Teck Corp’s Bullmoose mine south of Chetwynd in northeastern B.C. Inequity review

But the current dispute centres on a base price review clause allowing both parties to review the price paid for Quintette coal every four years. While base price discussions started on Dec 1, 1986 the two sides appear to be far from an agreement.

For that reason, the Japanese say they are within their rights to take the case to an arbitration hearing.

“We are confident that both the buyers and Quintette will get a fair hearing at arbitration and that the arbitrators will render a fair decision,” said Hayashi.