The settlement, which was completed around 20 April, is on a CIF basis but translates back to around US$48/t FOB Roberts Bank. This is spot on our forecast price for the Japanese price settlement (although the latter is of course on an FOB Queensland basis).

Salzgitter has crude steel production capacity of approximately 7 Mtpa. Its Salzgitter steel works comprises two large blast furnaces that produce around 5.2 Mtpa of pig iron. It will now be extremely difficult for the Japanese steel mills to achieve a price settlement much below the level of the Salzgitter deal. A Japanese settlement should follow reasonably quickly now, although upcoming holidays and conferences in Japan may delay settlement until mid May.

The European steel mills settled much later than the Japanese last year. In a firming market this resulted in the Europeans paying around US$45/t FOB for their hard coking coal, much more than the Japanese benchmark of US$42.75/t FOB. This year the Japanese benchmark price will have to play catch-up with the European price, with contract prices in both markets expected to equalise at around US$48/t FOB.

The first major semi-soft/PCI settlement has also been completed. Yanzhou Coal settled the price for Japanese fiscal year 2002 deliveries of Yanzhou No.2 brand to the Japanese steel mills at US$32.93/t FOBT, down 5.9% from US35.00/t in JFY 2001.

The deal was completed in mid April, actually pre-dating the Salzgitter hard coking coal settlement. This is the first time in memory that a long-term contract price for semi-soft/PCI coal into Japan has pre-dated Japanese hard coking coal settlements. Last year was the first time that Chinese semi-soft settlements into Japan predated Australian semi-soft settlements. The Yanzhou No.2 deal included provision for a substantial boost in tonnage, from 3.5 Mt in JFY 2001 to 4.5 Mt in JFY 2002.

With regard to steam coal, negotiators from the China Coal Group Corp will arrive in Japan on May 8 to resume price negotiations on thermal coal sold under the Japan China long-term trade agreement. Chinese exporters are also looking to substantially increase contract volumes of steam coal and, with market fundamentals worse for steam coal than semi-soft, it is likely that Chinese exporters will accept a price fall for steam coal in excess of the 6% fall for semi-soft. It would also not surprise if the Chinese exporters settled before the Australians.

The Chinese semi-soft price settlement is much as we expected and reinforces the likelihood of a fall in the Australian ‘reference’ steam coal price in line with our forecast of –7%, or perhaps a tad more. There is still quite a lot of water to go under the bridge with regard to Australia-Japan settlements for both semi-soft and steam coal.

Australian shippers are unlikely to roll over easily and will fight for a smaller decrease than that negotiated by the Chinese, who were seeking higher contract tonnages. Time, however, is not on the side of steam coal exporters, with spot prices continuing to fall during April. The spot price ex Richards Bay, South Africa, fell another 6% in April, prompting noises about production cutbacks from both Ingwe (BHP Billiton) and Duiker (Glencore). Spot prices ex Richards Bay have fallen a hefty 21% since the middle of 2001.

Spot prices ex Newcastle are also on a downward path, although pinpointing the true market price level out of Newcastle remains difficult. This market will continue to lack transparency until after the annual ‘reference’ price is settled. Surveys of Newcastle shippers would indicate Newcastle spot prices as of mid April were a little over US$28/t, but we would be surprised if anyone is actually paying that high a price for standard specification coal.

A totally different picture of the market was depicted by the results of an internet reverse auction held by Tohoku Electric on 22 April. The winning bid for 60,000t of steam coal was reportedly US$26/t FOB out of Indonesia, but Australian exporters were also reported to have submitted bids at around US$26/t FOB.

Spot steam coal prices may drift lower over the next couple of months but, with the Australian dollar appreciating against the greenback, any price falls below the US$24 - 25/t FOB Newcastle range would likely be met by fierce production cuts by Australian shippers.

Steam coal imports slowed substantially in the last in the last quarter of 2001, with steam coal imports by the ‘top five’ growing by ‘only’ 8% from the December 2000 quarter. This compares with a growth rate of over 20% in the September 2001 quarter. Metallurgical coal imports by the top five plummeted by 18%, influenced by the large fall in Japanese steel mill coal inventories.