BMA achieved a 12.4% price increase for ‘benchmarkÂ’ Goonyella brand hard coking coal from US$43.00/t in JFY 2001 to about US$48.35/t FOB for JFY 2002. Word of the deal with Nippon Steel leaked out on 11 July, but the settlement may have been finalised as early as 5 July. Settlement with Sumitomo occurred soon after, and BHPB has now finalised practically all of its annual contract negotiations in Japan.
Energy EconomicsÂ’ longstanding forecasts of a Goonyella hard coking coal price of US$48.00/t and a steam coal reference price of US$32.00/t have proven just about spot on this year, within the bounds of our US50c forecast increments.
Other companies coking coal settlements are now proceeding at a fairly fast pace, and look to be already further advanced than steam coal settlements (which have become bogged down as a result of the plunge in steam coal spot prices since the settlement of the Chubu reference price). All of the major Australian coking coal exporters have now settled some contracts with the Japanese steel mills, but few have concluded all of their negotiations in Japan.
The main Russian exporter of hard coking coal to Japan, Yakutugol, settled with the Japanese steel mills around 12 July with a price increase for its Neryungrinsky K9 hard coking coal of 9.5%, up from US$41.71/t FOB in JFY 2001 to US$45.67/t FOB for JFY2002.
Canadian producer Fording Coal was, of course the first to announce a settlement in Japan. Their announcement on 2 July was pretty vague, but reliable industry sources assure us that the price increase secured by Fording was close to 9.5%, which would mean that for the Fording Eagle brand the price has risen from US$42.85/t FOB in JFY 2001 to 46.90/t for JFY 2002. Fording has downgrade the sales forecast for its export mines by 5% to 15 Mt for 2002, or about the same level as last year. Sales were only 6.4 Mt in the June half (when the JSM throttled back its purchases from Fording during the negotiating period), but Fording is expecting sales to recover to 8.6 Mt in the December half.
Now that JSM settlements are well advanced with Australian, Canadian and Russian suppliers, the Japanese steel mills are expected to finalise prices with their only other significant hard coking coal supplier, China, at the next round of negotiations scheduled for the week ending 26 July.
The success of the BMA in achieving a better price increase than their competitors in Canada and Russia can be largely attributed to its excellent supply management strategy over the past year.
We were surprised that the BMA didnÂ’t boost production significantly last year to take advantage of high prices for hard coking coal. An increase in production would have been quite easy for the company to achieve, by extending washery operations into the weekend and reactivating spare dragline capacity. But the BMA strategy of targeting margins rather than volume has now proven to be a winner. The low volatile end of the market that the BMA exerts the most control over is significantly tighter than is the case for higher volatile hard coking coals, consequently higher volatile Australian hard coking coals are understood to have achieved lesser price increases, in the 10% to 11% range.
The market power of the BMA has been boosted this year as a result of the acquisition of QCT and the drying up of coking coal supply from the United States. Another factor contributing to the differences in price rises is a realignment to better reflect the value in use of coal brands, with particular emphasis on coke strength.
Settlements with Posco of South Korea and China Steel of Taiwan are expected to follow quite quickly, with both expected to meekly fall into line now that the long resistance of the Japanese steel mills to significant price increases has been broken. The chances of the BMA settling for a significantly lower price increase in these markets than in Japan appear slim to non-existent.
With hard coking coal prices having risen by around 9.5% - 12.5% this year and semi-soft/PCI having fallen by some 6% there is a strong incentive for integrated steel producers to use as much of the lower cost coals as possible. This trend is already showing up in Japanese and Korean consumption and import statistics, as discussed later. But, despite this incentive, consumption of hard coking coal is expected to be quite strong over the remainder of the year as a result of two main drivers.
- Steel prices have bounced back strongly from the lows of last year and blast furnace capacity utilisation is expected to lift in order to satisfy increased steel demand. The ratio of hard coking coal consumed is boosted when higher steel production is required.
- The supply of high quality coke exports from China is down again this year, and the shortfall will need to be made up by increased imports of coking coal into major Asian and European markets. Chinese coke exports were down 2.38 Mt (32%) in the year to May. If we extrapolate this over the full year we get a reduction in Chinese coke exports of 5.7 Mt – equivalent to 8.0 Mt of coking coal assuming it takes 1.4 tonnes of coking coal to produce a tonne of coke.
(Chinese coke production was actually up 9.8% in the year to May, but the booming local steel industry is sucking up much more than last year – China’s blast furnace iron production was up 17% in the year to May).
Meanwhile the steam coal market goes from awful to abysmal, with Richards Bay spot prices falling another 11% from mid June to mid July as tabulated below. This takes the cumulative fall over the past 12 months to 37%. Richards Bay spot prices continued to fall to around US$20.20/t FOB by 24 July but there is a general felling around the market that prices are now bottoming out. Weather patterns this year have impacted coal demand, with a mild winter in Europe and North America followed by a cool start to the summer in Japan.
But, by definition, anomalous weather patterns canÂ’t last forever and a return to more normal growth in steam coal demand is only as far away as the next heat wave. As discussed last month, producers are yet to make any radical adjustments to supply, but incremental scaling back of production plans is being implemented as profit on spot sales shrinks toward zero. We think the most likely scenario for the remainder of the year is that steam coal spot prices will begin a shallow recovery in August, with an end of year target for both Richards Bay and Newcastle spot prices of around US$24/t FOB.
Chubu will now be feeling rather sorry for itself after settling the steam coal reference price at US$31.85/t FOB Newcastle (US$29.60 after discounts). Asian utilities yet to settle long term contract prices are now clamouring for price levels closer to US$25/t. There have been some who have laid the blame for this turmoil in steam coal negotiations on Coal & AlliedÂ’s Newcastle marker price initiative on Global Coal, which saw a transaction at US$22.00/t earlier this month. But the premise that large utilities such as Taipower and the Korean utilities did not already know the true level of spot prices prior to this initiative appears somewhat laughable.
Such companies are, after all, regularly involved in letting their own spot tenders. In a paper delivered in Malaysia earlier this year we forecast that a liquid internet spot market for Newcastle coal would begin to develop this year, after annual Japanese price negotiations were completed. The development of such transparent and low cost platforms for selling and buying coal is not only inevitable but also desirable in terms of coals future as a modern fuel.
