In Commodity News 14/03/2016
A revolution is threatening behind the scenes in coking coal, pointing to heightened uncertainty in one of the most conservative of markets.
The move towards spot pricing that has been embraced in iron ore, and increasingly dominates thermal coal trade, has been until now largely sidestepped in coking coal, where buyers demand at least medium-term visibility on prices for different grades of product that are closely matched with steel mills.
But that could be about to change, at least in a scenario put forward by industry consultancy IHS.
Anglo American’s surprise decision in February to exit its high-quality Moranbah North and Grosvenor mines in Queensland, a deal regarded as fetching potentially $US2 billion ($2.68 billion) or more, could hasten the end of the system, clients at an IHS seminar heard this week in Sydney.
The current system of setting a quarterly benchmark price for coking coal, which is then accepted across the industry, is led by Anglo, with its coal regarded as comparable with the top-tier brands of BHP Billiton, which doesn’t engage in that process.
But with Anglo heading for the exit door and none of the large miners likely to be interested in those mines, the prospect arises of a buyer taking over – private equity, perhaps – that has no appetite to lead the critical pricing talks, IHS’s senior coal analyst Marian Hookham says.
While others, such as Teck, have tried in the past, those attempts have failed because few parties would accept the deal as a benchmark. That leaves the potential for a vacuum that could lead to a collapse of the whole quarterly benchmark system, Hookham says.
Resistance expected
However, considerable resistance is expected on the part of large Japanese buyers such as Nippon Steel, which only reluctantly accepted the move away from annual contracts in 2010 and has been prepared to pay a few dollars over the spot price to lock in costs and supply volume.
IHS points to a dramatic increase already in price transparency in the previously obscure metallurgical coal market through increased trading on the globalCOAL platform, which is popular for thermal coal.
Most of the coal appearing on the platform is sourced from BHP and is bought by traders closely linked to buyers. While that means the globalCOAL trading is not the pure third-party trading typical of more commoditised markets, “it is the emergence of a significant trend, which definitely will affect buying patterns throughout Asia as it evolves and develops”, Hookham says.
ANZ’s head of commodities research Daniel Hynes agrees the potential is there for at least a chunk of the coking coal market to shift more towards an exchange-traded system, which would be more palatable for regulators.
Even for Japanese buyers who have always been willing to pay a little more than the spot market for security of supply, the financial pressure on steel producers and plentiful supply might reduce that imperative, Hynes says.
Still, the fact remains that coking coal is less “commoditised” than either iron ore or thermal coal, with steel mills placing a different relative value on different grades, so standardising pricing will remain difficult if indeed it goes down that track.
Crunch time
Meanwhile, talks for the second-quarter benchmark for coking coal are reaching crunch time, with a slightly higher price likely than anticipated a few weeks ago thanks to the same China-inspired factors that have lifted iron ore, IHS’s Hookham says.
As a result, expectations for a rollover from the March quarter price of $US81 a tonne for premium hard coking coal into the June quarter have been replaced by modestly higher expectations, with $US82-$US84 now looking likely in a deal that could be struck by early next week, she says.
Compared with spot prices that reached $US330 in April 2011, the deal will bring little cheer to miners, particularly because oversupply is seen persisting through 2016, pushing a more substantial price recovery probably into 2017.
Source: The Sydney Morning Herald
