Steep coking coal contract by Japanese steelmaker worries Indian steel producers
Sharad Matade 11 March 2011

Nippon Steel is reported to have tied up supplies from Anglo American at $330 a tonne for the next quarter, compared with the current $221. Indian steel producers are hoping that this is an exception and that prices will settle down

Indian steelmakers' margins a likely to come under tremendous pressure if the coking coal contract for the April-June quarter is sealed at $330 per tonne, amid high inflation and lukewarm demand.

A Japanese newspaper reported yesterday that steelmaker Nippon Steel
Corporation and British miner Anglo American Plc had settled a coking coal contract for the next quarter at $330 a tonne, a huge increase from $221 a tonne in the current January-March quarter.

"Generally coking coal contracts by Japanese steelmakers are a benchmark for Indian steel companies. There could be a difference of between $2 and $5 a tonne, not more than that," Arun Kumar Jagatramka, managing director, Gujarat NRE Coke, told Moneylife. "But I think that in the second quarter, prices would come down. I don't think such high prices will be sustainable in the long term."

According to reports, large mining companies like BHP Billiton and Rio Tinto are looking at the possibility of monthly contracts, instead of the quarterly contracts that have been operational over the past year. Monthly contracts would make things more difficult for steel companies, as margins could see wild swings even within the quarter.

Japanese media reported that Anglo American was the only miner to offer quarterly contracts and this was why they had settled the contract at a higher price.

However, there is no concrete confirmation of the development. Industry experts believe that coking coal contracts would be settled at $300 a tonne, or even below $300, as steelmakers would not be in a position to pass on the hike to consumers.

Alok Kumar Nemani, analyst with Nomura Financial Advisory and Securities (India), told Moneylife, "Yes, we have also heard that contract prices have been signed at $330 a tonne between Nippon and Anglo American. But we are not sure about this."

Steelmakers across the globe have increased steel prices on the back of soaring raw material prices-coking coal and iron ore in particular-after supply was disrupted due to floods in Queensland, northeast Australia, the world's top exporter of the commodity.

"The effect of the floods on mining, rail movement and infrastructure is still there and most ports are without coking coal. Two to three months would be needed to normalise the situation," Mr Jagatramka said.

The coking coal shortage in the international market pushed spot prices to more than $300 per tonne. "Selected Indian steel buyers have bought coking coal at the rate of $360 to $380 a tonne in the last two months," Mr Jagatramka said.

However, the rate of the price rise has reduced, as steel demand has slowed down in India and China. Last week, steel companies, including Steel Authority of India, JSW Steel and Essar Steel, opted for a nominal hike, as demand has softened a bit particularly for long products.

But steel makers and industry experts in India believe that coking coal contract prices would not go beyond $300 a tonne.

Mr Nemani of Nomura said, "Our estimate was that contract prices for the April-June quarter would be between $280 and $290 a tonne, but on an average it could be $260 a tonne. Of course, as supplies of the commodity are very low, miners have the pricing power."

A senior steel industry official said, "We expect coking coal contract prices to be below the $300 a tonne mark as spot prices are correcting downwards."

However, rising concerns over inflation in China, the world's largest steel producer and consumer, and India, will be in the minds of steelmakers as they finalise contracts and they would be under tremendous pressure to increase steel prices on account of spiralling domestic inflation.

Also, the Chinese government is expected to increase interest rates to cool the economy. And this is reflected in Chinese steel prices which have been sliding since the end of February.
 
Although the Chinese government has hiked interest rates repeatedly over the past few months, there has been no major impact on the country's steel production. But any further such rate hikes to curb inflation could affect market sentiment and impact production, analysts say.

In India, also, demand for steel products-mainly long products-has softened a bit due to the lack of big order flows from the government for the infrastructure sector. Also, private companies are finding it difficult to execute orders due to the high cost of borrowing and hurdles in land acquisition.

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