Dynamics of international price negotiations

The beginning of Spring usually marks the time for the announcement of annual international coal prices since these contracts have traditionally followed the Japanese Fiscal Year which starts on April 1st. For many years negotiations were relatively straightforward with one of the larger Australian miners agreeing an annual price with a Japanese customer which the rest of the market would accept as a benchmark. In recent years however the dynamics of this pricing arrangement have changed substantially, particularly for coking coal.

Internationally traded coking coal, along with most other commodities, has seen a surge in demand with the recent and dramatic industrialisation of China and other emerging economies. With supply struggling to keep up and prices rising, more and more volumes began to be traded on spot markets putting pressure on the old system of annual contracts. During 2010, in order to benefit from these rising prices, the larger mining companies successfully changed most of their contracting to a quarterly basis. Despite some opposition from steel customers, the vast majority of coking coal sales are now settled from quarter to quarter with a still very liquid spot market providing a benchmark for these contracted prices. Thermal coal has similarly seen more activity on the spot market but contracts have remained on a yearly basis since this market is more static and the prices somewhat lower than coking coal.

The first quarter of 2011 saw the international premium hard coking coal contract benchmark price settled at US$225/t, which was following an upward trend from previous quarters due to improving economic conditions and tightening global supply. Severe flooding in Australia during this quarter caused major disruption to the seaborne coking coal market and caused spot prices to peak at US$380/t in January, which was almost 70% higher than 12 months previously. Miners therefore entered second quarter negotiations expecting to benefit from these tight market conditions and eventually settled on a benchmark price of US$330/t. The annual thermal coal prices were also due to be settled at the beginning of April. However, the devastating earthquake in Japan delayed the finalisation of negotiations with Japanese power utilities looking for concessions due to their uncertain economic outlook. A settlement price was recently set at US$130 which looks likely to be accepted as the benchmark thermal coal price.

European coal prices have tended to follow these international trends with most coking coal contracts in the region now moving to quarterly pricing. The regional thermal coal market has also been influenced by the Japanese earthquake with increasing pressure on European governments to scale back on their nuclear power ambitions which is expected to increased coal demand for electricity generation with a knock on effect on prices.

Stephen Hough,
Market Analyst, New World Resources,
shough@nwrgroup.eu