- A groundbreaking deal for a 55 per cent increase in coking coal prices, a key input in steelmaking, has been agreed between BHP Billiton, the world’s largest miner, and JFE Steel of Japan. The contract, which will run only for the quarter between April and June, marks a break with decades of tradition under which contracts were agreed on an annual basis.
- This new deal with see JFE pay $200 a tonne for coking coal instead of the $129 a tonne under its current annual contract which expires at the end of the month.
- The amount was higher than expected, said William Burns, an analyst with Johnson Rice & Co. Burns, who expected JFE and other companies to pay only about $150 per ton, said this shows how aggressive countries have become in competing with China for natural resources. "China has become a black hole, and the Japanese steel makers are trying to lock up their supply," Burns said.
- The sharp increase in coking coal along with rising iron ore costs is set to push up steel prices, possibly by around 30 per cent, according to analysts.
- Earlier this year, BHP Billiton said that it wanted to shift to quarterly contracts that track spot prices more accurately and away from the annual negotiations under which the first deal agreed between a miner and a steelmaker created a benchmark which was then followed by the industry that year.
- Analysts said JFE’s acceptance of a quarterly contract was likely to force others to follow. Miners and steelmakers, including ArcelorMittal, Baosteel of China, Nippon Steel and South Korea’s Posco, have begun their frequently acrimonious discussions to settle prices for the 2010-11 contracts, due to start on April 1.
- The deal for a 55 per cent increase is the strongest sign of tightness in the coking coal market and bodes well for miners from BHP Billiton to Xstrata. Spot coking coal prices have risen sharply to about $220-$240 a tonne after a drop in China’s domestic production forced Chinese steelmakers to import. China imported about 30m tonnes of coking coal last year, up from only one tonne in 2008. Beijing’s shift to an importer follows a clampdown on illegal and unsafe mining operations.
So aside from the "big 3 miners", the obvious play here are the "met coal" makers, which have been some of the biggest movers of late. I had been mulling moving out of Potash (POT) (which has been stagnant) and into one of these names or an iron ore maker for my commodity exposure the past few weeks. Did not pull the trigger....frankly the area has been an outperformer since last fall [Nov 18, 2009: Potential Breakout Candidates]
3 American companies with good metallurgical coal exposure....
The "stock of the week" last week was SinoCoking Coal and Coke Chemical Industries (SCOK)....
Reader "StoneFoxCapital" also found Puda Coal (PUDA) - a Chinese coal miner, focused on coking coal... looks like the market discovered it Friday.
On the iron ore side - we see similar pricing potential; this UK Telegraph story says prices could close to double by April.
- Just one month ago, analysts were looking for a 40pc increase in the iron ore benchmark this year. Now some are saying an 80pc increase will still make the commodity look cheap. We are even seeing a shift in the position of the Chinese, as they learn their intransigence could cost them money. If the country's steel makers fail to agree on a sensible price hike, they may have to buy at the spot price. This could get very expensive indeed, as the spot has got way ahead of last year's agreed benchmark. It is now more than double the $60.40 a tonne agreed with Japan in last year's pricing talks.
- The current spot price is at about $134 a tonne, however, industry publication Steel Business Briefing reported last week that some spot deals to China from India were taking place at more than $140 a tonne.
- Moves by Vale in Brazil last week have also made China's position look untenable. Brazilian customers will see near doubling of iron ore produced in their own country. Steel Business Briefing reported: "Brazilian mining group Vale is seeking to increase its iron ore prices for domestic buyers by 40pc in March and another 40pc in April, according to normally reliable sources in the domestic iron and steel sector."
- Steel groups elsewhere are already accepting the fact that price rises are inevitable. On Thursday, ArcelorMittal, the world's largest steel maker, said that it expected an 80pc hike in benchmark contracts.
- Vale has traditionally been a defender of the benchmark system, with BHP Billiton being the most vocal miner arguing for a move away from the annual system. With last week's move, it looks like Vale is getting more aggressive and is, slowly, coming around to BHP's way of thinking.
Suddenly it feels like late 2007, early 2008 all over again... even with global economy activity at far lower levels.
Long Potash in fund; no personal position