Japanese contract prices for hard coking coal, semi-soft coking coal and energy coal have all fallen by around US$2/t FOB Australia. Low volatile PCI coal is the odd man out with producers in this sector achieving small price increases.
As has been widely reported, major Australian suppliers, presumably Enex and Rio Tinto, settled with Tohoku Electric for a price fall of ca. US$2/t (7%), from ca. US$28.75/t to around US$26.75/t FOB. Less widely known is that the first settlements actually occurred before the middle of March, with one Australian exporter saying that his company has already settled 85% of its utility contracts into Japan.
All sources contacted have indicated that the reported new price for Japanese fiscal 2003 of ca. US$26.75/t is truly representative of the general level of settlements into Japan (i.e. it is not a ‘headline’ price subject to substantial discounting). It is not clear at this stage if any prices have been indexed to spot prices. Coal & Allied and Tohoku had been talking of introducing such indexing this year.
The energy coal price settlement is somewhat above our forecast of US$26/t. Australian exporters have successfully played the exchange rate card, arguing that with the current strength of the Australian dollar mine closures would result from any greater price reduction.
On one hand the price can be seen as a good result for Australian exporters, given that spot prices had tumbled to US$23/t FOB Newcastle by the end of March – this for coal that is oftentimes identical to that purchased under the long term contracts.
On the other hand the settlements are unlikely to have caused much celebration amongst exporters. If the Australian dollar stays near current levels of US61c for the rest of the year, compared with the average for JFY2002 of around US$56c, the effective long-term contract price in Australian dollar terms will fall by 14%, from AU$51.30 to AU$43.90/t (based on the Tohoku numbers).
Korean utility settlements are expected to follow shortly, although Chinese suppliers have only recently finalised last year’s prices into Korea! Taipower operates on a June financial year so its settlements may not occur for some time.
Spot energy coal prices are expected to remain well below the new contract prices for most of 2003 hence the proportion of coal Asian utilities purchase on spot can be expected to soar.
The main internet trading platforms in the region, globalCoal and CoalinQ, will likely step up to a new level of trading liquidity over the coming months. Japan’s largest coal consuming utility, Electric Power Development Corporation (J Power) has already made it known that it will increase its purchases of Australian coal via globalCoal by an order of magnitude. Last year J Power purchased 100,000t of Newcastle coal via globalCoal but may hit a million tonnes this year.
Turning to hard coking coal, prices have fallen on average by US$2/t, but as predicted price cuts have varied widely depending on coal quality considerations. The price of the benchmark Goonyella brand appears to have fallen by US2.10/t (4.3%), from US$48.35/t FOB in JFY 2002 to ca. US$ 46.25/t FOB for JFY 2003. This is slightly above our forecast of US$46.00/t, reflecting a recovery in coking coal imports over the last quarter of 2002. Contract prices for low volatile hard coking coal fell significantly less than Goonyella, with the overall range of cuts for premium hard coking coal being mainly between US$1.80/t and US$2.30/t.
Fording, which now of course represents practically the entire Canadian export coking coal business, has also settled Japanese contract prices, with price cuts of over US$2/t, with the price falls being much the same in quality adjusted terms as for the Australian coal brands.
Chinese negotiations may continue for some time. High domestic hard coking coal prices will make it difficult for Chinese shippers to swallow similar price cuts. Premium hard coking coal prices in China jumped from US$50.70/t to US$54.40/t in late March following a catastrophic explosion at the Meng nan zhuang mine in Liiliang Province. With Chinese coking coal and coke markets remaining tight, shortages in coke oven capacity around the world have been thrown into even sharper relief.
Few coke ovens have been constructed over the past decade in advanced countries, owing to environmental constraints, high capital costs and, until 2002, weak steel markets. This has placed ever-higher reliance on imported coke, with China being the dominant supplier. High coke prices have prompted steel producers in Japan and the United States to dust off plans for new coke ovens, although it remains to be seen if this renewed interest is sustained as the steel market accelerates into the current down cycle.
Annual price negotiations with the Brazilian steel mills have been completed with average prices also down US$2/t, but with some brands of less sought after coal reportedly falling by up to US$2.50/t FOB Queensland. European hard coking coal settlements are also practically completed. Unconfirmed reports have it that the BMA and Arcelor reached agreement to roll over prices at US$58-US$59 C&F. This seems somewhat out of step with the Japanese settlements, as it would translate back to US$44 – US$45/t FOB Queensland at today’s sky high spot ocean freight rates. But of course the weighted average of BHPB’s freight costs over the course of the year is unlikely to be as high as the current spot freight.
