WITH coking coal price talks deadlocked just weeks ahead of current contracts ending, Australian coking coal miners are pressing Asian steel mills to agree to a significant "provisional" or interim price hike, given that talks appear destined to extend well into the new contract year.
While provisional pricing has been seen before when price talks drag out beyond the contract year start, in the past the old contract price often simply applied until a new price was agreed to, and then backdated. But this time, with sparse spot sales being made at as much as three times above the contract price, the miners are insisting on banking a large slice of the inevitable contract price increase now, rather than waiting.
Coal is Australia's largest commodity export earner. The Australian Bureau of Agricultural & Resource Economics is forecasting 2008-09 export income from coking coal at almost $28 billion, with thermal coal export income at $14.6 billion.
Nicole Hollows, chief executive of Queensland-based miner Macarthur Coal, said that once the new contract year started on April 1, miners wouldn't allow provisional prices to remain just at last year's levels.
"Given there is a significant increase in prices expected, producers will be asking for (higher) provisional pricing because you won't want to be on the same contract price," Ms Hollows told The Australian.
The miners can use so-called "mutual collaboration" clauses which in exceptional market circumstances allow them to seek higher provisional prices as a compromise when definitive price talks are dragging on.
Coking coal markets are soaring on the back of floods that hit key production out of Queensland, especially that of the world's biggest exporter BHP.
The flooding has forced some steel mills to scramble for rare spot supplies, with reports of spot sales at over $US300 a tonne, compared with the 2007-08 contract price for hard coking coal of $US98 a tonne.
Analysts are now forecasting contract prices to more than double, with UBS predicting a hard coking coal price of $US225 a tonne, while Goldman Sachs JB Were has forecast $US250. But with rumours that aggressive marketers such as Xstrata are seeking a contract price above $US300, Japan's steel mills are baulking at settling.
While there are rumours that BHP's negotiating team flew into Tokyo late last week, market sources agree that BHP has so far kept a low profile in the price talks in a sign that it is prepared, at least for now, to let the likes of Xstrata put the squeeze on the steel mills.
That has left the steel mills out on a limb as they believe the extremely tight spot market is only temporary. And they are wary of a US economic slowdown weighing on the steel sector and that therefore the miners need to moderate their contract price demands.
"It is looking like a Mexican stand-off at the moment," one coal price negotiator said.
Clyde Henderson, coal analyst at Barlow Jonkers in Sydney, said the floods and economic uncertainty in the US had complicated price talks, but he wasn't ruling out a "late rush" of settlements in coming weeks.
The key priority for BHP meanwhile is to simply get its coal to market after the floods cost it about six weeks of production. It has declared force majeure on contract deliveries which frees it of obligation to deliver on time.
Macarthur has also been hit by the rains, but is still hoping to meet its 2007-08 sales target of 4 million tonnes.
"We have had a little bit more rain but it isn't going to significantly impact, and we are still hopeful that we'll make our throughput, though it will be a challenge," Ms Hollows said.
The market for thermal coal prices is also tight as infrastructure bottlenecks in Queensland and NSW restrict exports, while Chinese exports have shrunk as the country husbands production for its own markets.
Last week China set its 2008 export quota at 53 million tonnes, down 24 per cent from last year's 70 million tonnes. But in effect, exports will be flat after actual exports out of China last year were limited to just 53.17 million tonnes.
Both GSJBW and UBS are forecasting 2008-09 benchmark thermal coal prices at $US130 a tonne, up from $US56 a tonne last year.
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