Japanese steel deals in doubt as coal surges

Japanese steel deals in doubt as coal surges


Nippon Steel is said to be demanding December quarter contract prices of $US160 a tonne

Hard coking coal spot price/contract price

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• The Australian
• 12:00AM October 10, 2016
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• MATT CHAMBERS
  
  Resources reporter
  Melbourne
  @mattchambers1
  

A dramatic surge in the spot price of Australia’s second-biggest export, coking coal, has seen Japanese steel mills delay new contract settlements that would deliver big gains to Australian miners, in a standoff over an expected doubling of the contract price that could spell the end of the current pricing system.
Australian coking coal spot prices have surged 155 per cent since the start of June to a four-year high of $US213 per tonne as China cracked down on mining overcapacity at the same time that government stimulus fired the housing market, while rain and derailments hit Australian supply.
The price is now more than double the still-standing September quarter contract price of $US92.50, with the size of the potential jump in the new contract price delaying settlement more than a week into the December quarter.
While BHP Billiton, the world’s biggest coking coal shipper, has moved almost completely to spot pricing and is reaping the benefits of the surge, other Australian miners are still receiving a contract price less than half that of current spot prices as they wait for price settlement.
Japanese steel mills are delaying settling the current quarter’s price, which is normally set at close to the spot price at the start of the quarter, as they hold out for a hoped-for fall in spot prices.
As reported in The Australian last week, the surge in coking coal prices looks like being the major driver in a wiping out of Australia’s monthly trade deficits for the first time in more than two years.
Price negotiations between Japanese steel mills and Australian miners continued on Friday in Sydney at the 33rd Japan-Australia Coal Conference, a closed meeting of coalminers and users that occurs every two years.
Whitehaven Coal managing director Paul Flynn, who was this JACC meeting’s co-chairman, told The Australian it was too early to say where contract prices would settle.
“It’s a different paradigm from what we’ve been seeing,” he said of the price gains after a period of plentiful supply that had sent prices steadily lower over the past four years.
“Settlement of this contract may take a little while because people are trying to get their heads around this recent price change.”
Whitehaven, which produces both coking coal used in steelmaking and the thermal coal burned by power stations, is exposed to the quarterly coking price settlements but is not participating in the negotiations.
According to Macquarie commodities analysts, Nippon Steel is demanding December quarter contract prices of $US160 a tonne.
But miner Anglo American wants $US212, which would be in line with the regular practice of settling at spot prices at the start of the quarter.
“Japanese mills are wary of losing face if they commit to a quarterly price anywhere near spot and the market reverses, while there is also uncertainty to the extent that such a large increase in raw materials costs could be passed through to steel customers,” Macquarie said.
“There are also question marks around whether any settlement will be possible in these conditions, with some (market participants) now calling for the end of quarterly contract system and a move to index pricing.”
The price of Australian PCI (pulverised coal injection) coal, a lower-grade steelmaking ingredient whose spot prices have not risen as much as premium coking coal, settled last week at $US133 a tonne, in line with the spot price.
Mr Flynn said calls to dissolve negotiated contract pricing would probably not prevail in this pricing round. “I think those comments have some place, but I don’t think that the system is going to go away quite yet,” he said.
“Both sides have an interest in having some pricing certainty.”
Tim Hard, steel director at price compiler The Steel Index, said a settlement near current spot prices could accelerate the end of quarterly prices. “If supply (then) comes back into the market in a meaningful way to take spot prices below whatever negotiated price agreed on, it could put terminal strain on the system,” Mr Hard said.
Daily spot prices of coking coal measured by The Steel Index have not fallen since August. Still, the Japanese mills’ tactic of holding out could pay off.
China this month gave 800 coalmines permission to boost output, in a move that Macquarie says has the potential to reintroduce 60 million tonnes of lost annual capacity on to the market.
“Although this won’t fill the entire supply gap, it is clearly a meaningful addition, which should be incrementally price-negative,” the bank’s commodities analysts said.
“From a Japanese mill perspective, continuing to wait it out in the negotiations or going to index might now be the preferred route.”

http://www.theaustralian.com.au/bus...s/news-story/6c49b03650e409397b40835d7ca57e37