Coal news and updates

A push by BHP Billiton, the world’s biggest resource company by market value, to have coking coal prices set by an index-based pricing system has encountered further resistance.

BHP has been attempting to establish market-linked pricing in the Asian market since 2010. It has also been selling increasing volumes of coking coal, an ingredient used in steel making, directly into the spot market.

 

However, many steelmakers, particularly in Japan, continue to favour longer-term fixed pricing arrangements, which give greater certainty over price and supply of brands they prefer. This is particularly important for coking coal where impurity levels and other properties vary from mine to mine.

In the latest pricing round, many of BHP’s rivals were able to settle quarterly contracts with major Asian steel mills on the traditional fixed-price basis, at around $120 a tonne, according to traders. That was down 16 per cent quarter-on-quarter and below the levels seen during the global financial crisis.

In contrast, Asian mills shunned BHP’s monthly index-linked offers and the Melbourne-based miner was forced to sell a greater amount of coal directly into the Chinese spot market. The coal was sold at a discount to the quarterly contract price, according to the McCloskey Coal Report.

“Japanese steelmakers continue to demonstrate support for the quarterly pricing system, prioritising supply security and stability,” said Macquarie analyst Stefan Ljubisavljevic.

BHP declined to comment on the negotiations.

BHP is the world’s biggest supplier of seaborne met coal, which is combined with iron ore in blast furnaces to produce steel. Traders reckon its spot index-pricing push has cost the miner hundreds of millions of dollars in lost revenue.

“BHP has this almost religious belief that unless commodities trade on index or there are derivatives then it’s not a mature market,” said one industry veteran. “But if shareholders wake up to what’s happening they may have to stop trying. Coking coal isn’t like thermal coal or iron ore.”

Met coal prices have fallen from more than $300 a tonne in 2009 to around $105 a tonne today, in part because of increased supply from the US, China, Canada, Russia and Australia.

In thermal coal, benchmark contract prices are expected to fall by more than 10 per cent this year as supply growth, particularly from Indonesia, continues to weigh on the market.

Earlier this week, Glencore Xstrata settled a deal with Tohoku Electric Power, the Japanese utility, to supply thermal coal for the year starting April 1 at $81.80 per tonne – the lowest settlement in five years.

Glencore usually sets the benchmark for thermal coal, which the industry then follows. The Japanese thermal coal contracts, which run from April to March, affect directly and indirectly the prices used for a large chunk of the global seaborne market. At the start of the year analysts had been forecasting a settlement price of $90 a tonne.

The price of thermal coal, which is used in power generation, has dropped from around $130 a tonne in 2011 to $75 a tonne. Although demand has remained strong over that period, it has been offset by supply growth, particularly from the fast-growing Indonesia market.

Thermal and coking coal are an important source of profits for global mining companies, including BHP, Glencore, Anglo American and Peabody.

 

 

Source: ft.com