News Room - Steel Industry

Posted on 09 Mar 2010

BHP Closer to Market Price for Coal; Shares at Record

BHP Billiton Ltd., the biggest mining company, moved closer to a goal of scrapping annual price deals with steelmakers, saying it agreed to sell coking coal on “shorter-term” contracts in Europe, China, India and Japan.

 

The company “reached terms for a significant portion of its hard coking coal volumes for 2010,” Melbourne-based BHP said today in a statement, without giving figures. “These settlements reflect the company’s commitment to achieving market clearing prices over time across all its bulk commodities.”

 

BHP, part owner of the biggest coking coal export business, is seeking shorter contracts for coal and iron ore to benefit from surging market prices and Asian demand. JFE Holdings Inc., Japan’s second-biggest steelmaker, said March 5 it would pay $200 a metric ton in a three-month contract. The deal was the first of its kind, according to Macquarie Group Ltd.

 

“Steelmakers in China and worldwide must contend with the prospect of sharply higher raw material costs, not only in the form of benchmark iron ore price hikes but also from substantially higher imported coking coal prices,” Jing Ulrich, chairman of China equities and commodities at JPMorgan Chase & Co. in Hong Kong, wrote in a report today.

 

BHP rose 1.2 percent to a record close of 2,233 pence in London. The shares began trading on the exchange in 1997. Its Sydney-traded stock advanced 2.4 percent to A$43.51.

 

BHP, Teck Resources Ltd., Xstrata Plc, OAO Mechel, Rio Tinto Group, Alpha Natural Resources Inc. and Massey Energy Co. are among mining companies that will benefit from more frequent pricing, UBS AG wrote in a March 3 report.

 

Four Decades

 

The four-decade-old annual iron ore pricing regime fell apart last year after Chinese mills failed to reach agreement with suppliers. Coking coal and ore suppliers traditionally hold annual talks with steelmakers to fix benchmark prices for the 12 months from April 1, the start of the financial year in Japan, the world’s second-biggest importer of the ore.

 

The JFE coal settlement “signals that the Japanese are moving toward the idea of flexibility of pricing,” Jim Lennon, a commodities analyst at Macquarie in London, said March 5. “It’s pretty certain that you are going to see a similar development in iron ore.”

 

Contract prices for iron ore and coking coal will double in the next two years, Nomura Holdings Inc. said this month. Morgan Stanley forecast annual contracts this year may settle at $222 a ton, while market prices may average $203. The annual contract expiring March 31 is priced at $129 a ton.

 

Three Options

 

BHP offered customers three options for coking-coal contracts, UBS said Feb. 18. The first was for half of supplies to be priced annually and half quarterly; the second option is for supplies to be divided between quarterly and semi-annual contracts; the third is for all prices to be set quarterly.

 

China is the largest importer of iron ore and Japan is the biggest coking coal buyer. Some Asian steelmakers will struggle to pass on higher costs, Morgan Stanley said on March 2. Chinese mills increased iron ore purchases to a record last year to meet demand for steel fueled by the nation’s stimulus spending. Coking-coal imports rose 10-fold in 2009, Morgan Stanley said.