Japan Steelmakers Suffer From China Cuts as Coal Tops $200

  • Hard coking 4Q contract may increase by 51% to $140/t: WoodMac
  • About 65% of seaborne coal supplied under quarterly contract

Japan’s steelmakers are set to pay for China’s effort to manage its coal industry as a surge in metallurgical prices flow through to quarterly supply contracts.

Spot hard coking coal has more than doubled this year to trade above $205 a metric ton and the gain will be taken into consideration when Japanese steel mills and miners negotiate a supply contract for the fourth quarter. A deal may be agreed at $140, according to Wood Mackenzie Ltd., 51 percent higher than the third-quarter accord and the highest since early 2014.

Japanese steelmakers have largely avoided the 147 percent boost in prices since the start of June, buffeted by a third-quarter contract for premium hard coking coal set at $92.50 a ton. Chinese mills, which favor spot deals, have been contending with the surge as the nation cuts production, while robust steel output increases demand. About 65 percent of seaborne coal is supplied under quarterly contracts, according to Morgan Stanley.

“There’s enough tightness in the market to justify a price above $120 and up to $140,” said Robin Griffin, director of global metallurgical coal markets for Wood Mackenzie. “That’s going to be pretty hard to take for the Japanese. Yet again they find themselves in a position where they are competing with the Chinese who are driving prices up for coal.”

Spot hard coking coal climbed to $205.90 a ton on Friday, according to data from The Steel Index. That’s a record for the index, which started on January 2013. Contract prices are still below the $330-a-ton record in 2011 after floods curbed supply from Australia, the world’s biggest exporter.

Biggest Buyer

Japan imported 54.1 million tons of metallurgical coal in 2015, according to Morgan Stanley, making it the biggest buyer of seaborne product. China was the second largest, shipping 48 million tons. Output cuts and flooding in the Shanxi province helped to boost total overseas purchases last month to the most since December 2014.

Japanese steelmakers Nippon Steel & Sumitomo Metal Corp. and JFE Holdings Inc. said current steel prices exceed the levels at which they are able to secure profit margins and must pass along higher costs to customers if contract prices increase, according to representatives from both companies.

Negotiations on quarterly deals typically take place the month before the start of the new quarter. While miners will seek to lock in higher prices, they may already be limiting the downside. Contract structures typically include delivery flexibility and producers look to deliver minimum contract volumes when spot prices rise, Macquarie Group Ltd. said in a Sept. 6 report.

BHP Billiton Ltd., the world’s biggest shipper of metallurgical coal, is the biggest winner of the price rally, with at least half of its output sold under spot deals, according to a Sept. 2 note from Morgan Stanley. The price gains are unlikely to be sustained over the medium to longer term, according to BHP.

“The market has been in the doldrums for quite some time, but the shackles are off now,” said Matthew Boyle, a Sydney-based industry consultant at CRU Group. “Fundamentals support a price rise but not the spike we are seeing. Three weeks ago, people in the industry were saying a contract at $120 a ton seemed like fair value. That now looks too low.”

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