There are further indications that consumers are preferentially buying from small and mid-sized producers in order to build up pressure on their main protagonists in the coking coal negotiations, BHPB and Fording. While Australian coal stocks rose to a new record level at the end of last November, mid sized producer M.I.M maintains that it is sold out of both coking coal and energy coal through until June 2003 – except for 100,000t of out of specification coal.
On the other hand, BHPB found it necessary to close down the Goonyella, Riverside and Saraji mines for an extended two week break over the Christmas and New Year period in response to high inventory levels, returning to work on January 6. BHPB typically builds up coking coal stocks in Queensland during October and November to provide a buffer for potential production disruptions over the wet season, which usually starts in December.
So far this year, however, the monsoonal rains have failed to penetrate as far south as the Bowen Basin. BHPB contends that its extended Christmas shutdowns were primarily due to higher than expected production resulting from the dry summer. But it is also surely a sign of weak hard coking coal sales and an attempt to bring inventories back under control prior to settling annual Japanese contract negotiations.
The extended Christmas shutdowns at numerous Australian opencast operations should see export coal inventories drop significantly when figures for December and January are released.
The dry summer, by the way, has led to low water storage levels at many Bowen Basin mines. Water conservation measures have been introduced but, to our knowledge, the water shortages have not yet led to any significant production constraints. Many Bowen Basin opencast mines pipe in water over long distances – for example the northern BHPB mines pipe in water some 150 km from Eungella, which is located inland from McKay. Opencast mines located adjacent to underground mines have fewer problems with water shortages, as water can be sourced from flooded old workings. Port operations at Hay Point are also suffering from water shortages.
In the critical Japanese market blast furnace iron production rose to 80.979 Mt in 2002, up 2.7% from 2001. This was quite a strong rise for blast furnace iron production given that it is buffered from fluctuations in steel demand by changes in output from Electric Arc Furnaces. Japanese steel production was boosted by an increase in iron and steel exports to an estimated 36.8 Mt in 2002, up 19% on 2001 levels.
Furthermore, there is still some concern regarding the impact of the storm damage to one of the two shiploaders at Westshore Terminals in Vancouver, Canada, despite Westshore indicating that export shipments will not be significantly affected over the six-month period it will take to reconstruct the shiploader.
The divergent forces on Japanese hard coking coal negotiations this year are summarised as follows.
- High Australian metallurgical coal inventories.
- High ocean freight charges and a weakening dollar are assisting struggling US exporters in European markets, potentially increasing Pacific Rim overcapacity.
- Low prices in Turkish tenders in the second half of last year.
- New capacity coming on stream at Hail Creek later this year.
- The price gap between hard coking coal and semi-soft/PCI is much greater than usual following last year’s settlements.
- Strong steel production in coking coal importing countries.
- Chinese export coke prices remain very high and Chinese coking coal supplies are tight.
- Continued falls expected in US coking coal exports, albeit at a slower rate.
- Mining problems at Moranbah North
- Weakening US dollar with respect to other exporting countries – increasing world
average US$ denominated FOB costs.
While the competing factors appear well balanced, experience indicates that the most important pointers to annual price settlements are inventory levels and recent tender prices. We are therefore of the opinion that Japanese contract prices for premium hard coking coal will fall by some US$2.50/t this year, from US$48.35/t FOB Hay Point to around US$46.00/t.
The Japanese steel mills may try to push through settlements with their Russian coal suppliers first, given that Chinese coal and coke supplies are quite tight (with some talk of Chinese exporters defaulting on contracted shipments) and Canadian companies are distracted by their proposed megamerger. The steel mills will, of course, be keen to cement a price fall with a smaller producer early on. Semi-soft/PCI coal may be the first metallurgical coal type settled, given that the JSM can mount the clearest case for a significant fall in this category (Although Japanese electricity utilities could just as well beat them to the punch by settling energy coal first).
It is understood that negotiators from Krutrade, a major Russian coal exporter, are visiting Japan this month for negotiations with the JSM. Krutrade exports steam coal and PCI and has been very price competitive of recent times. Representatives of China National Coal Industry Import Export Group are currently in Japan negotiating semi-soft coking and energy coal prices.
CNCIEG was the first to settle with the JSM in 2001 and 2002, for semi-soft/PCI, but it seems less likely that it will be the first to settle this year. Another pointer to the tightness of the Chinese coking coal market is that Australian exporters are reporting increased hard coking coal solicitations from coastal Chinese steel mills.
Turning to energy coal, spot prices have remained quite steady over the past month. We continue to believe that Japanese longterm contract prices will fall from the current level of around US$28/t FOB Australia to around US$26.00/t for JFY 2003.