As previously reported, benchmark prices have been set with BHP Billiton Mitsubishi Alliance striking a contract with Nippon Steel at $US128-129 a tonne – a 57% drop on 2008 prices.

A benchmark for thermal coal has also been set, with Xstrata and Japan’s Chubu Electric Power agreeing on $US70-72/t – a 44% drop.

National Australia Bank said supply constraints in both the thermal and coking coal markets would be a likely source of upward price pressure once global demand recovered through 2010 and beyond.

“Although contract prices for the 2009 Japanese fiscal year have fallen significantly from their 2008 levels, they remain relatively high and consistent with the trend [in level terms] since 2003. This is consistent with NAB Group Economics terms of trade forecasts for calendar years 2009 and 2010,” NAB analyst Benjamin Westmore said.

NAB said while recent signs of industrial and manufacturing growth from China boded well for the steel industry, the slump in the US and emerging Asia would substantially affect Chinese and Japanese exports.

“This suggests much of the outlook for global steel production growth, and hence demand for Australia’s coking coal and iron ore resources over the near term, is levered to the pace of turnaround in the US economy.”

NAB was positive in its long-term outlook, stating that over the next two to three years it saw coking coal prices gradually increasing from current levels as the global economy recovered, with upward price pressure in 2011-12 owing to supply constraints.

The bank also pointed out that, despite the 44% fall in the thermal coal contract benchmark price, spot prices were currently still around, or above, mid-2007 levels.

While news out of Australia’s biggest thermal coal buyer – Japan – has not been good, with industrial production slumping and an emissions trading scheme proposed, NAB did see some good news from India.

It said India could have an offsetting influence, with the government planning to double coal-fired electricity generation capacity by 2017.

“To do this, five [of nine] new mega power stations will use imported coal because of the high sulfur and ash content of Indian fuel. Also, the relatively high cost of Chinese thermal coal mining means that Chinese demand for imported coal is likely to support prices in the near term,” Westmore said.

ANZ analysts were also positive on India’s influence, pointing out 70% of India’s thermal power utilities were operating with one week’s supply of coal.

“Together with the need to restock ahead of the June-to-September monsoon season, Indian coal imports could tandem strong Chinese imports in the coming month,” ANZ said.

China’s coal imports rose 169% year-on-year in April to 9.16 million tonnes.

News out of Newcastle is also looking positive with 36 ships waiting off the port on Tuesday.