CHART: Coking coal surge could kill quarterly pricing

The stunning rise in the price of coking coal shows now signs of reversing, and the nearly three-fold rise in the price of the steelmaking raw material since hitting multi-year lows in November last year has pushed the quarterly benchmarking system to breaking point.

Metallurgical coal was exchanging hands at $213.40 on Tuesday according to data provided by Steel Index as it consolidates at higher levels following weeks of panic buying not seen since 2011, when floods in key export region in Queensland saw the price touching to $335 a tonne.

CHART: Coking coal surge could kill quarterly pricing

Source: SGX

A new research note Adrian Lunt, head of commodities research at the Singapore Exchange, says the traditional quarterly benchmark mechanism has "arguably been losing relevance for some time, but the recent spot market volatility has put it under potentially fatal strains":

The commoditisation and rising adoption of indexation has been a key feature in the seaborne coking coal market in recent years. In recent years the quarterly settlement has largely followed the spot market, and a prolonged period of price stability perhaps enabled the quarterly benchmark to persist (albeit pricing an ever-shrinking portion of the international market).

During Q3, the daily spot price averaged almost $133 per tonne, approximately 44% higher than the Q3 quarterly benchmark agreed in late June. With spot and benchmark pricing deviating more than ever, strains are likely to persist on the outdated quarterly pricing mechanism. Continued market volatility could spur a more widespread transition to index-linked pricing over the coming months, which may in turn serve as an important catalyst in the development of the international coking coal derivative market.