Old School Coal Dealing Nears End as Nippon Flags New System

By: | at 08:57 PM | Maritime  

Japan’s lead negotiator on metallurgical coal contracts with global miners has sounded the death knell on a decades-old practice of setting prices after volatility whipped up by an Australian cyclone and China output cuts roiled markets.

Nippon Steel & Sumitomo Metal Corp. will shift to buying coal at rates linked to published price assessments starting from the current quarter, according to spokesman Masato Suzuki. The move comes after mills and miners were unable to agree on a fixed contract for the second quarter as spot prices surged and then slumped after tropical cyclone Debbie disrupted Australian supply.

Spot prices spiked above $300 a metric ton on two occasions over a six-month period amid China’s efforts to cut overcapacity and as rain from Debbie swamped rail lines in Australia’s biggest metallurgical coal producing region. Spokesmen for Anglo American Plc and Glencore Plc, which settled the first-quarter contract with Nippon, declined to comment on the pricing change.

“The price mechanism appears to be on the verge of shifting predominantly to index-based,” said Tom Price, a commodity analyst at Morgan Stanley in London. “The evolution is almost complete. For a complete transition, we just need to see met coal’s derivatives market evolve a bit further.”

Spot coal surged to a record $314 a ton on April 13 as deliveries were cut to export terminals in Australia. Prices have more than halved since hitting their peak, closing at $146.20 on Tuesday. The first-quarter contract was agreed at $285, the highest in more than five years, after China’s domestic output cuts led to a boost in imports.

Nippon will use spot indexes provided by S&P Global Platts, The Steel Index and Argus for pricing of metallurgical supplies, Nippon spokesman Suzuki said Monday. The shift will apply as of April-June quarter.

Japan’s steelmakers started negotiating annual supply deals with Australian producers in the early 1970s after their own resources were exhausted, according to Morgan Stanley. While BHP Billiton Ltd., the world’s biggest exporter of the metallurgical coal, pioneered the transition to quarterly agreements in 2010, the company has been continually seeking to have the commodities it sells priced in terms that better reflect market dynamics.

“Our contracts are all linked to indexation and it has provided us with an opportunity to get the right price for our commodities,” Arnoud Balhuizen, chief commercial officer at BHP, said earlier this month in Melbourne. “It’s a pricing mechanism that will provide liquidity, price transparency and create much more efficiency. We are not participating in the quarterly benchmark.”

Metallurgical coal is among the last commodities to be fixed through negotiations between customers and sellers. Ferrochrome and potash are still priced using this system, according to Macquarie Group. A similar annual pricing system for iron ore was fractured in 2009 after four decades.

“This is the end of the fixed quarterly” for met coal, Colin Hamilton, Macquarie’s global head of commodities research, said by email.


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