Projections on new coking coal contract negotiations
Supported by the argument that there has been a drop in the growth of annual global steel output, some market players predict that demand for raw materials will taper off in the coming years. The growth of steel
production worldwide this year is expected to be six percent, while next year's growth will slip to five percent.
The general market expectation is that steel producers' demand for
coking coal in 2006 may not be as strong compared to that of 2004. While the steel industry tends to underline the likeliness of comparatively lower
coking coal contract prices in the framework of the approaching negotiations for 2006, suppliers are optimistic that they can fetch higher prices. Most suppliers admit that the red hot demand of 2004 is not there to push the prices to record breaking levels, but they certainly believe that this crucial steel making raw material may well be on track in 2006.
Coking coal is a vital raw material used to produce the metcoke that fires the blast furnaces. The highest quality
coking coal is the low volatile
coking coal of Queensland,
Australia. However, there are many other grades and qualities of this material, such as semi-soft
coking coal and mid- and high-volatile
coking coal. The major suppliers of
coking coal are
Australia,
Canada, the US and
Brazil.
The major benchmark of market prices is set by the long term contracts concluded between the Australian coal suppliers and the Japanese steel makers by April 1, i.e. the beginning of the Japanese fiscal year.
The main player in the determination of
coking coal contract prices is of course
Japan. However, as a market that accounts for one third of worldwide steel
production,
China without doubt also has a very important role to play in the coke industry as well.
China has a large metallurgical coke
production capacity. In view of their high inventory levels of steel, the availability of this crucial raw material for steel making naturally increases. This eventually weakens the demand for
coking coal, the same demand that was responsible for the higher prices earlier this year and which caused international miners to focus on capacity improvements to meet the needs of the tight market.
Furthermore one must note that Chinese steelmakers might prefer to trim down their imports and use local supply instead, bringing down their costs.
This brings us to a point where we face an increased availability of
coking coal with a rather controlled demand, which gives force to the argument for lower prices in the 2006 contracts.
Market specialists, on the other hand, are more optimistic about the high-quality
coking coal situation. As the supply is tighter for this type of material, the price is less likely to fall. For instance, Australian giant
Rio Tinto indicates that no significant drop is expected to be seen in hard
coking coal. The company indicates that costs in the coal business will be 20-30 percent and that long-term prices are unlikely to revert to previous lows.
The
coking coal industry, largely run on a long-term contract basis, will definitely be influenced by the slowdown of steel
production. The question, however, is to what extent. The previous huge price hikes were expected by the steelmakers because they were backed up by strong steel prices. Current market conditions do not seem to be providing such ground for steelmakers to expect price hikes. Further more,
coking coal prices in the spot market are not very promising, having fallen from their peaks of over $200/mt to prices below the existing contract levels.
As opposed to the above signs, one argument that could well be valid for demand not to weaken drastically is the changing circumstances at steelmakers. Most newly built mills are designed as integrated facilities that use blast furnaces as opposed to EAF. Even then, a valid argument against this fact could be that even though more blast furnaces will come on stream in the future, these new furnaces will be increasingly efficient because of constant improvements in technical infrastructure. This allows for a rather controlled raw material
consumption level.
Considering all the above facts that might impact the supply/demand balances in one fashion or another, we might bear in mind that there is yet some time before we can know with any certainty how the new contract prices will end up. Exaggerating the circumstances of comparatively slower demand might lead to unhealthy results.