The Japanese steel mills will be getting a little uneasy that there is still no sign of the weakening of coking coal markets that they have been hoping for, with pressure rising for a substantial price rise.

A reliable source notes that Curragh has this month settled an annually priced contract for a small tonnage of hard coking coal with a Shanghai steel mill at around US$51.50/t FOB. Curragh hard coking coal has historically been discounted by about 3.6% below the premium Goonyella brand price, so the price of US$51.50/t for Curragh coal equates to a little over US$53/t FOB for "benchmark" brands.

Some Queensland hard coking coal exporters are already reporting that they have sold out for 2002 assuming rollover of volumes with existing customers. Negotiators from BHPB and MIM return to Japan for the next round of negotiations in mid-February.

Our forecast for JFY 2002 hard coking coal prices remains unchanged at an increase of 12% from US$42.75/t FOB to US$48.00/t for Goonyella brand coal.

The semi-coking coal market is also looking strong. We have been able to confirm recent reports that Curragh achieved a price increase of around US$4/t FOB (a little less than 11.5%) for 2002/2003 supplies of semi-coking coal to Indian steel producer Tata Iron & Steel (Tisco).

Curragh has a long-term annually priced contract with Tisco, with the US$4/t increase kicking in for the year commencing 1 July 2002. Tisco uses Curragh semi-coking coal for stamp charging coke ovens - a process that enables the production of good quality coke while using high blend ratios of cheaper semi-coking coal.

On the steam coal front, Australian exporters are returning to Japan for negotiations with Chubu during the first week of February, but little progress is expected before the settlement of hard coking coal prices. It is only tradition that dictates that coking coal contract prices are settled first.

This harks back to the days when coking coal formed the bulk of Japanese coal imports. Steam coal imports will continue to grow at a faster pace than coking coal, so some time in the future steam coal settlements may well take place before coking coal. But tradition remains an important factor in East Asia coal purchasing arrangements, so it is unlikely to happen for a few years yet.

Spot steam coal prices are currently in recovery mode after taking a battering in October and November last year. South African prices have risen a little in each of the last two months, but still remain below US$30/t FOB Richards Bay.

BHPB has reportedly settled some of its annual contract prices into Europe at prices between US$29.5 - US$30.0 per tonne FOB Richards Bay.

Steam coal demand in the major European markets remains strong, assisted by cold snaps in some countries.

In the Pacific Rim market, the recovery has lagged that of the Atlantic by a month. Spot prices ex-Newcastle belatedly recovered in January following a 1.4Mt fall in Australian export steam coal stocks in December (from 8.8 Mt at the end of November to 7.4 Mt at the end of December). The fall in stocks was assisted by an extended Christmas shutdown at Mount Owen and by increased exports to China.

Glencore reportedly sold coal to Mexican utility CFE at US$28/t FOB Newcastle recently, but as of mid-January exporters mostly seemed happy to snap up any sales in the US$27.0 to US27.5/t range.

The export stock figures should be treated as being indicative only, being derived from an industry survey by the DISR. Regardless of the veracity of the fall in stocks in December, stock levels still remained uncomfortably high at the end of 2001.

Anecdotal evidence points to there being a lot of steam coal inventory still about, in the Hunter Valley in particular, but the downward trend in stock levels in December does appear to have accelerated into January. Coal stocks have also reportedly fallen by 1.5 Mt each at the ports of Richards Bay and ARA (Amsterdam-Rotterdam- Antwerp).

Enex is talking up sales of steam coal into China as a sign of a quantum shift in market balances in China, forecasting a rapid increase in China's coal imports, and stagnation in China's net exports over the next five years.

China's coal trade is inherently volatile, so we believe it is premature to surmise that Chinese net coal exports have peaked. China's coal imports in fact jumped to 10.2 Mt in December (although reported exports are traditionally high in December and low in January) and Chinese coal exporters have remained quite aggressive in the spot market during January.

Nevertheless, the current surge in Chinese coal imports has certainly come at the right time for Newcastle exporters – having reduced producer inventories and underpinned prices in advance of annual Japanese utility contract settlements.

The rebound in spot prices and the more positive news on stocks has prompted an upward revision in our forecast for Japanese utility long-term contract prices for JFY 2002, to a 7% fall. This reverses our previous forecast downgrade, to a 10% fall, made last November when spot prices appeared to be in free fall.

With regard to future spot prices, it is likely that the current rebound will stall at below US$29/t FOB Newcastle. Sufficient steam coal supply will be stimulated at spot prices between US$25/t and US$29/t to satisfy expected demand growth this year. With exchange rates in many of the exporting countries remaining weak against the greenback, good profits can still be made, on and un-hedged basis, at such price levels We therefore expect spot prices to remain in this US$25/t – US$29/t range for most of 2002.