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Coking coal spot prices make further declines

By Hector Forster

April 30, 2009 - Spot metallurgical coal prices made further three-month declines of about 17% for some benchmark grades after the huge correction in the first quarter to largely converge with 2009 benchmark fiscal year settlements heard done in March for PCI coal and later for hard coking coal supplied by top seaborne exporter BHP Billiton-Mitsubishi Alliance.

Owing to huge declines in Q1-2009 steel output in north-east Asia, Europe and the Americas, spot activity was minimal amid postponements for contracted deliveries despite some mills heard taking advantage of the situation to procure tonnage at prices half of 2008 benchmark levels and with freight costs currently negligible.

Platts' latest coking coal price assessments for Q2-2009 show values slid by a smaller degree compared to the last quarter-on-quarter decline of as much as 58% for prime low-volatile Queensland coking coals, with Q2-2009 values assessed at $125/mt, down from $150/mt in Q1-2009, and $355/mt in Q4-2008.

Recent Chinese buying of hard coking coal from Australia, that Platts reported at about $140/mt CIF, was probably the only new significant spot business heard this year as other transactions involving cargoes performed at spot-level prices may just be renegotiated terms on pre-contracted tonnage, according to a source at a market trader. (See chart: Australia Queensland Coking Coal, April 2008 - March 2009)

"You have to ask are they newly fixed cargoes. Almost no new cargoes are fixed cargoes, they're some kind of renegotiation" on term tonnage, the source said. "There's been very little spot trade, most people don't have immediate demand or have carry-over deals [on FY 2008 tonnage] that need to be serviced."

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Spot shipments of Australian hard coking coal were continuing to flow to China with buyers expected to take delivery of about 2 million mt in March on top of about 1 million mt each month in January and February. Sources in the region told Platts more cargoes were expected to arrive in Q2 2009 and some suppliers were offering cheaper prices and creating different blends to meet customer requirements.

BMA settlement

The biggest coking coal news arguably in March was that BMA had settled FY 2009 term contract prices with Nippon Steel at $128/mt and $129/mt for its top grades of Goonyella and Peak Downs respectively. BMA's benchmark settlements in FY 2008 were around $300/mt and spot prices spiked as high as $400/mt in summer 2008 before plunging to the $150/mt level when Platts published Q1-2009 prices in January.

The reported BMA 2009 settlement price in Japan came in at a higher level than some investment bank analysts had forecast, and the fact that it was independent of FY 2008 carry-over tonnage led many to expect some higher-priced coking coal production in eastern US and Canada's British Columbia would manage to remain viable in the face of advantageous Australian dollar exchange rates for BMA, Anglo Coal, Xstrata, Rio Tinto and other Queensland-based producers. (See chart: Canadian West Coast Coking Coal, April 2008 - July 2009)

Whether spot prices would be supported by the reported settlements for hard coking coal acting as a floor following the 65% plunge from Platts Q4-2008 assessment levels was put to an industry analyst, who told Platts: "As more Chinese mines come back online and Chinese domestic prices go down, the window of Australian coal to be competitive could quickly close. Its fallacious to not think there is risk of downside."

Whether BMA were negotiating settlement prices with European and other regional buyers at equivalent levels to the Nippon Steel accord was also unclear. As FY 2008 carry-over tonnage was thought be a much weightier issue in negotiations with ArcelorMittal, an acceptable price agreement between the steel and coking coal behemoths may take several more months longer to achieve, the trader source said. A lower price settlement with ArcelorMittal and the consequence of subsequently lower adjusted prices for previously settled contracts at the BMA-Nippon Steel level may inevitably drag spot values down, given the expectations of low demand as steel output may fall by 10% or more from 2008 levels this year based on forecasts by banks and consultancies.

'2010 may be another 2007'

The spot coking coal market may not pick up until 2010 at the earliest as carry-over tonnage from FY 2008 is performed at full, or renegotiated lower price levels depending on the supplier and each contract, while coal volumes contracted in new FY 2009 business reflect the expectations of output curtailments that the mills probably can now confidently forecast, the analyst said.

"2010 may set up for another 2007. We may have one year of massive destocking and in 2010 they may contract less [coal] than they need," ramping up spot coal prices, the source said, explaining this would be dependent on the pace of any recovery in the steel market which analysts now believe will only really take hold in 2010.

This may prevent more aggressive price makers like Xstrata from going ahead and negotiating higher contract prices post the BMA benchmark accord like the Swiss-based miner did in 2008, investment bank analysts at FBR said in a recent report.

"We do not believe the [coking coal] price will be higher, as we saw last year with Xstrata. With the 2009 coking coal price uncertainty partially removed (some risk that Brazilian and European steel makers will not sign "me too" contracts), the main risk is how much volumes will be purchased," FBR said. "Chinese buyers will still be price-sensitive in this generally weak fundamental steel market."

The China Coking Industry Association (CCIA) said March 9 it expects China's coke consumption in 2009 to drop by 50 million mt year-on-year and weak demand for coke would lead international coking coal prices to stabilize at around $100/mt FOB in 2009.

Mining costs 'gone up exponentially'

Chinese domestic coking coal prices were set at about $180/mt in early 2009 but these are expected to soon be adjusted downwards to match international levels. Current Russian domestic prices for hard coking coal are said to be about $45/mt at mine while Mechel was reported to have signed export term contracts for small volumes with Japanese buyers at $90/mt FOB Posiet. Prices at the latter level would threaten North American producers that have mining costs that have "gone up exponentially" and the scarce volumes of top quality low-volatile and low sulfur coal available of East Coast miners would mean they would get less than the BMA benchmark levels for their so called 'generic' inferior grades.

Teck, owner of Elk Valley Coal, reported operating and transportation costs per ton that neared C$100/mt in the latest quarter and further appreciation in the Canadian currency would spell more trouble for the miner, an investment bank analyst said. Some US producers face even higher costs at mine and to port, leading to a number of publicized Appalachian pit closures already.

The BMA settlement has thrown a lifeline for higher cost producers but even at these prices, they remain susceptible to unfavorable currency moves, the analyst said.

Semi-soft coking coal prices have yet to settle for FY 2009 but they are expected to only carry a slight premium on annual thermal coal contracts, which were agreed at around the $70/mt mark by Xstrata and Chubu Electric earlier in March. Platts assessed Q2-2009 spot semi-soft prices at $80/mt, equal to spot PCI coal values assessed for the period.

South Korea's POSCO was understood to have settled low-volatile PCI term contracts with Australian suppliers for FY 2009 at $90/mt FOB and Japanese steelmakers were said to have been followed at similar levels but these accords are likely to involve some cancellation of previously contracted tonnage at an average $240/mt to $245/mt FOB.

Steel prices are still falling, despite a short-lived period of support earlier in the year on the back of some Chinese activity. Blast furnace margins are likely to be razor thin, even at lower-than-term-contract spot price levels for coking coal and iron ore, given pig iron is heard valued now at about $200/mt.

ArcelorMittal back in January expected stabilization may be seen at actual price levels and further price recovery may be seen in 2009/2010 but conceded that the "short-term (one-two years) will see negligible growth in real [steel] demand, linked to GDP and steel intensity."

The Platts coking coal assessment values cited are midpoints of ranges currently and previously published for each quarterly period.

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