Coal prices up for negotiation
Big resource companies are preparing to send their representatives to the annual coal and iron ore price negotiations.
QUEENSLAND'S big wet has helped drive spot prices for the steel-making raw material coking coal to $US220 a tonne, opening up a $US13 billion ($A14.4 billion) annual revenue gap on contract prices set almost a year ago when the financial crisis was playing havoc with demand expectations.
Australia's coking coal producers, led by BHP Billiton, are now in preliminary talks with steel makers in Asia to close that gap, raising expectations that contract coking coal prices could rise by more than 70 per cent in the Japanese fiscal year (JFY) starting April 1.
Japanese trade press this week highlighted the fears of the Japanese steel makers that BHP - the world's biggest coking coal exporter from its Bowen Basin operations in Queensland - would look to increase its opening offer for a new contract price of $US200 a tonne for the first quarter of the JFY by as much as $US40 a tonne, taking it to $US240 a tonne.
Last year's contract price settlement, which runs out on March 31, was $US130 a tonne for premium-quality hard coking coal.
An analyst at EL & C Baillieu, Adrian Prendergast, is forecasting a contract price settlement of $US225 a tonne. ''Unlike iron ore, of which there is plenty, there is a very real shortage in coking coal that we think will be exploited by the producers this year,'' he said.
He said China's switch last year from exporter to importer of coking coal had altered pricing dynamics. ''China consumes as much of our coking coal as India does now whereas two years ago they were pretty much self-sufficient. Metallurgical (coking) coal remains our top commodity pick for 2010; increasing our expectations for the JFY 2010 (contract price) to more closely reflect the developments in the spot market, which is indicative of the pressure on consumers in the current market,'' he said.
''Consequently we are factoring in a much higher benchmark price of $US225 a tonne, while maintaining our belief that metallurgical coal's long- term sustainable price level is still closer to $US155 a tonne,'' he said.
This week, analysts at Goldman Sachs JBWere highlighted the $US20 billion annual revenue gap between the 2009-10 contract price for iron ore and the spot or market-clearing prices, which resulted from the surge in spot iron ore prices to more than $US130 a tonne, more than double the soon-to-expire $US61-a-tonne contract price.
''We cannot understand why any producer would not look to urgently and decisively receive the market price,'' the broker said.
Since 2005 BHP managing director Marius Kloppers has been pushing for the iron ore industry - and eventually the coking coal industry - to do away with annual benchmark settlements.
In more recent times he has been joined in the push by the world's biggest iron ore exporter, Brazil's Vale, and to a lesser extent, Rio Tinto, which is hampered in its public positioning on the issue while its chief iron ore negotiator, Stern Hu, remains in jail. Andrew Forrest's Fortescue Metals is not big enough in the production stakes to be anything but a price follower.
Last month Mr Kloppers said that the spot market was the ''best indicator of what the supply and demand is, and is the best indicator of what expectation should be on where prices are heading''.
Mr Kloppers later told ABC TV that the move to market-clearing prices was the only way to ''avoid the friction'' of the annual benchmark price negotiations. BHP has sold as much as 46 per cent of its iron production at market-clearing prices, giving it 8-10 per cent higher iron ore receipts in the December half than implied by the benchmark settlement.
Mr Kloppers comments were followed up by Vale, which said the spot pricing of iron ore was a reality. ''It has to be seen as the market price today. Our customers will have to accept a different price system," Vale said. It noted the spot market was now almost 50 per cent of the total seaborne market and in China, it was nearly 70 per cent of the total iron ore market.
