Macquarie Commodities notes that while “the first quarterly coking coal settlement for 2010, for the initial Japanese fiscal year quarter of April-June, represents only a single quarter, and the Japanese steel mills still have hopes of resuming annual negotiations for July onward, it does set an important precedent in the market. In essence, it appears BHP Billiton (through BMA) has achieved its objective of moving much closer to a market-clearing price for contract settlements. The $200/t FOB Australia settlement reported between Nippon (followed by JFE, Sumitomo and Kobe) and BMA represents a 55% rise over the 2009 JFY price of $129/t.”
This is in line with the lower end of market expectations for the premium Peak Downs and Goonyella brands. “Even given the short-term nature, it also represents an earlier settlement than seen in the previous couple of years of protracted negotiations. Given the current spot price level of circa $215/t FOB, this agreement is much closer to the prevailing spot price than in previous bull markets,” Macquarie continues. In 2008, when a $300/t settlement was achieved, it represented a $50/t discount to spot at that time.
“It should be noted that the Japanese mills have not yet totally given up on a longer-term agreement (Nippon has forcefully stated its wish to revisit this issue next quarter), and the announcement did not state all contract tonnage would be sold at this level. Furthermore, many other producers (US exporters, Anglo) have shown some willingness to settle an annual deal with the Japanese. Given their success previously, Xstrata may also look for a higher settlement for its premium Oaky Creek material than $200/t, so while Friday’s announcement does provide a marker, the overall perspective is still relatively murky. We reiterate our view that this is the point of no return for the annual benchmark, and quarterly change eventually based on spot indexes will become the norm.
“The big question is how the price moves in the July-Sep quarter. The Japanese mills have been looking for a discount for any annual price based on a softening market later in the year. Conversely, those miners looking to negotiate annually have been looking for a premium to reflect the potential market tightness.
“The flow of imports into China will be key to this, in our view – if they maintain the 3 Mt-plus monthly levels seen in recent months (rising to 5.3 Mt in January), a further $15-20/t rise is highly probable. The mining companies will also have been bolstered by a low 3.3% growth target for domestic cola production in China (all coal types) announced by the National Development and Reform Commission. Given that China is currently more than 90% sufficient in met coal, and we estimate the country’s pig iron production will rise by 52 Mt in 2010 (requiring ~36 Mt of additional met coal), any further shortfall in domestic supply could pave the way for the next wave of imports.
“We also reiterate our belief that the larger blast furnaces built in recent times require higher-quality coke, entailing use of premium hard coking coal. With premium grades in short supply in China and coke blends using increasing volumes of hard coal, imported material will continue to find a market.
“Another key factor will be the ability of the swing US met producers to bring incremental export material to the market. Many companies have announced their intention to do so; however, we believe that, by the time the material is mined and shipped to port, it will be 3Q before this has any significant impact on the market. Thus, overall the coking coal market continues to look extremely tight through 2Q10, and the price risk remains firmly to the upside.
On March 8, BHP Billiton announced that it had reached terms for a significant portion of its hard coking coal volumes for 2010, based on a structural change to shorter term market based pricing for the contract period. The company has reached agreement with a range of customers throughout Europe, China, India and Japan.