Much of this can be put down to a build-up in the coking coal inventories of the Japanese steel mills, which increased stocks to a near record 7.012 million tonnes at the end of March. This build-up was in advance of the end of the Japanese financial year 2004, when sharply higher metallurgical coal prices and an increase in the coal tax came into effect. The only higher JSM inventory level of recent years was 7.252Mt at the end of November 2001.
JSM coal inventories were nearly 3Mt higher at the end of March 2005 than they were at the end of March 2004, when supply disruptions in Canada and Australia curtailed coking coal availability.
The Japanese mills actually consumed less coal in the March 2005 quarter (16.078Mt) than a year earlier (16.439Mt), but their coal purchases in the March quarter (16.543Mt) were over a million tonnes higher than a year earlier (15.281Mt).
Japanese coking coal imports are therefore likely to fall significantly through the current quarter, as the steel mills work down inventories to more normal levels.
The coal tax is levied at the time the coal is received, rather than when it is consumed, so there is every incentive for major Japanese coal consumers to increase imports in advance of each step up in the rate of the coal tax. Readers will remember that the Japanese coal tax was introduced on 1 October 2003 at a rate of 230 yen per tonne, increasing to 460 yen on 1 April 2005 and 700 yen (US$6.60/t) on 1 April 2007.
Interestingly, the Japanese electricity utilities did not build up their inventories in a similar manner. Utility coal stocks were 5.58Mt at the end of March, which is actually lower than normal. The likely reason for this is the relatively late settlement of annual contract prices for steam coal. The last thing consumers want to do is to buy a lot of extra coal while they are negotiating annual contract prices.
Chubu Electric settled its contract prices in January, but the settlements of the other utilities dragged on into late February. This left most of the utilities with insufficient time to buy additional coal in time for delivery prior to the 1 April increase in the coal tax. Hard coking coal prices for JFY 2005 were settled in December, leaving plenty of time for the steel mills to build up inventories in advance of the new fiscal year.
With the Japanese steel mills holding large coal inventories we may soon see the first real downward pressure on metallurgical coal prices since the current boom commenced in late 2003.
Further evidence that the Japanese steel mills are now comfortable that they have secured sufficient coal is that their purchases of coking coal from the United States dried up in April and prices headed down.
Pig iron production in major coking coal importing countries, excluding China, grew only 0.4% in the four months to April according to the latest IISI data. A blast furnace outage for relining in Korea didn’t help. But while the traditional coking coal importing countries only managed to produce 0.4Mt more pig iron in total, China increased production by 22.7Mt! Furthermore, there is as yet no sign of slowdown in Chinese output, with its April pig iron production up 34.4% year-on-year. China in fact accounted for all bar one million tonnes of the total growth in world pig iron production in the first four months of the year.
World pig iron production grew by 23.63Mt (10.3%), from 229.94Mt to 253.57Mt. World steel production is slowing faster than pig iron production, so the electric arc furnace sector is, as usual, bearing the brunt of the slowdown in steel demand. For example, in the EU 25 region steel production was down by 1.3%, whereas blast furnace iron production increased by 0.9%. So while it appears highly likely that metallurgical coal prices will start to decline soon, prices are likely to remain well above historical averages leading into next year’s annual price negotiations.
The proof of the pudding in terms of coking coal prices will be in the results of two Indian tenders for coking coal that close in June. A SAIL tender for 0.5Mt of hard coking coal to be delivered between July and December closes on 7 June. An IISCO tender for 0.09Mt of coking coal closes on 16 June.
Turning to steam coal, Newcastle spot prices continue to track sideways at around US$52.00/t FOB. While Newcastle prices are fairly steady these days, Richards bay prices are highly volatile. A train derailment halted railings on the Richards Bay line between 2 May and 8 May, which threw a bit of panic into the market. On 6 May, during the rail outage, a physical trade was done on globalCOAL for June delivery at US$51.75/t FOB. This was up nearly US$5/t on the prevailing price prior to the derailment.
But in the week following the derailment Richards Bay spot prices tumbled by over US$6/t. On 13 May a physical trade was done on globalCOAL for June delivery at US$45.50/t FOB. That was not the end of the volatility, with Richards Bay spot prices rising again to end the month at US$50.00/t.
The market appears to be confident that Richards Bay spot prices will rise to substantially above US$50/t later in the year, in the lead up to the European peak winter demand season, but the market seems totally unsure where prices will head over the next few months. Perhaps it all depends who your weather forecaster is, with summer temperatures in Europe likely to dictate spot price levels over the next few months.
