Spot steam coal prices out of Richards Bay fell to US$45.0/t in mid January, having fallen nearly ten dollars in the space of only two months. Richards Bay prices did, however, bounce back to US$46.50/t in late January, mainly as a result of a cold snap in Europe.

There is unprecedented disunity in the ranks of the Japanese utilities at this year’s contract negotiations. Chubu obviously thinks the steam coal market will tighten up again, while the other Japanese utilities believe the market will continue to weaken.

It is hard to see why the other Japanese utilities should settle JFY2005 prices at US$54/t when Newcastle spot prices are US$50/t and falling. It therefore looks increasingly unlikely that the other Japanese utilities will fall into line with the US$54/t Chubu settlement. Average JFY2005 utility contract prices could end up at around US$52/t FOB, leaving Chubu stranded with higher coal prices than its competitors.

On the low volatile PCI front, one Queensland producer of low volatile PCI coal has settled with the Brazilian steel mills at a little over US$100/t, and another is close to settling “at a number that will certainly be triple digit”. There have also been settlements in Europe at the magic triple digit level, but the Japanese steel mills are holding out for a lower figure. Our forecast for contract prices into Japan has been increased to US$100/t FOB, up US$2/t from last months forecast of US$98/t.

There have not yet been any settlements of semisoft prices into Japan yet, but Rio Tinto is understood to have put an offer on the table in the high eighties. Energy Economics’ forecast for JFY2005 semi-soft coking coal prices remains US$83/t FOB.

With steam coal prices likely to increase by a relatively modest 16%, producers are already making moves to maximize production of metallurgical coal at the expense of steam coal. In Queensland, Yarrabee mine has already moved a dragline into an area conducive to producing more PCI coal, and Ensham is looking at similar initiatives. Most of the redirection of steam coal will however be in the Hunter Valley, were coal currently sold as steam coal can be washed to a lower ash content to produce semi-soft/PCI products.

With regard to hard coking coal negotiations, the Japanese steel mills have practically completed settlements with their Australian suppliers. Xstrata ended up settling base tonnages at US$125/t FOB for JFY2005, in line with earlier BHPB and Elk Valley settlements, but apparently secured some additional tonnage in the US$130’s. Korea’s only integrated steel producer, Posco has also settled its Australian contract prices for this year at US$125/t for premium hard coking coal.