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Rio Tinto (ASX:RIO) declared force majeure on coal deliveries last week. Essentially, that means the company reneged on coal supply contracts. Yet…today it’s demanding higher prices for similar contracts with Japanese company Chubu Electric.

Which one is it, Rio? Do you want to sell coal or not?
Just in case you’re wondering what on earth is going on…here’s a brief explanation.

Coal supplies have hit a wall in the last two months. China struggled through one of its worst winters, with coal mines effectively inactive due to freezing temperatures. South Africa lost a lot of electricity when infrastructure failed.

In Australia, it rained. Coal miners got wet, and they couldn’t dig. This was why Rio reneged. Coal contracts are forgiving on miners in poor conditions. If the miner can’t haul up coal, they don’t have to sell it. That makes sense.

Winter in Asia meant the raging furnace that is China’s coal appetite added a few extra degrees of heat. It couldn’t burn its own coal, so it had to import even more than usual. Australia and South Africa replied sheepishly…

“Ummm…ahhh…we know we usually have some coal for you China…but today it’s been raining. Coal’s gonna cost you an extra US$80 per tonne. We hope you understand. Like we said…it’s been raining.”

China couldn’t have been happy about this. But in the spot market, which adjusts every week in Australia, coal is now about US$80 more expensive than fixed supply contracts. The going rate for contracts is US$55. Spot price has ballooned to US$135.

Now, that’s starting to make more sense. Rio Tinto just wants its contract prices to equal the market price.

Will it pull this ambitious deal off? Quite possibly. There’s little scope for the supply issues in place to ease in the short term. The question is whether coal supplies look like improving before the next contract roundtable in Asia. That meeting has already begun, in an informal way. Stay tuned.

MAVERICK