Commodity Blog

Archive for February 9th, 2009

A Japanese steel producer said Monday that metallurgical coal buyers have accepted that sagging global steel demand doesn’t warrant the cancellation of all unwanted contract tonnage in the current fiscal year, but they are still holding out for suppliers to cancel some high-priced fiscal 2008 term deliveries. The source also said 2009 contract prices may have to be settled higher than in 2007 to allow for long-term sustainability in met coal supplies.
Representatives of market leader, BHP Billiton-Mitsubishi Alliance, kicked off FY 2009 talks with their North Asian customers in late-January, and have told buyers that “a contract is a contract,” the Japanese source said. BMA is expected to resume talks in Japan later this month, the source added.
Previously, market sources said Asian steel mills are finding it difficult to take delivery of their outstanding contracted FY 2008 coal tonnages and buyers were hoping that the current situation could be considered a force majeure condition.
EARLY 2008 PROJECTIONS MISSED THE MARK
FY 2008 tonnages for annual contracts starting April 1 were procured at record-high prices in early 2008. Prime hard coking coals from Australia and Canada were priced at about $300/mt FOB, largely as a result of flooding in the main Australian metallurgical coal-producing state of Queensland in early 2008, and partly due to harsh winter conditions in Canada.
In early calendar 2008, the metallurgical coal supply situation was extremely tight, forcing steelmakers to cough up high annual prices for their FY 2008 coal supplies. Mills also entered into contracts for additional tonnages on top of projected requirements for FY 2008 in anticipation of events that could further constrict supply–such as mine accidents, weather disturbances and equipment failure.
Projections made in early 2008 were too optimistic and were overshadowed by the global financial meltdown, which started in mid-September and sent commodities pricing and freight rates on a downward spiral. For the mills, the financial crisis meant they had to cut down on their steel production. This put them in a quandary regarding how to deal with outstanding, high-priced, contracted 2008 tonnages that they no longer required.
BMA LIKELY TO FIND PROPOSAL HARD TO SWALLOW
In late January 2009, BMA informed its customers that FY 2008 contracts must be honored, the Japanese source said. However, buyers are still negotiating with their suppliers to reduce the delivery of a portion of their outstanding FY 2008 contracts.
“We know this kind of proposal will be very hard for BMA and other suppliers to accept,” the Japanese source said. “We want to talk to our suppliers on a commercial basis, not on a legal basis,” the source added. The Japanese coal buyer also said that the FY 2007 price of $98/mt FOB for prime hard coking coal “is too low” as a price settlement for FY 2009. He said he personally believes that FY 2009 prices should settle at between the FY 2007 and FY 2008 prices, suggesting a price of $120 to $150/mt FOB.
“We don’t want our suppliers to go under. We have to think of future availability of coking coal. Pressuring suppliers to agree to very low prices for 2009 will not be good for buyers in the long term,” the source said.