Get ready for a big jump in coking coal prices

Coal price volatility has not been an issue for the Japanese steel mills since the industry switched to quarterly pricing in April 2010.  Over the last 12 months, quarter-on-quarter price changes for coking coal has ranged from just 7% to no more than 12%:

Contrast this with the huge price swings of the last two years:  In 2008, following extensive flood damage to Australian mining and transportation infrastructure, the price of coking coal jumped by 206% from $98/tonne to $300/tonne – before dropping by 57% in JFY 2009. In Q1 2010, the price jumped by 55% – from $129 to $200.

Now the industry is bracing itself for yet another major jump in pricing, following the worst flooding in Australian history; already coking coal spot deals have been reported at $350 per tonne or more.

No surprise then that over the last few weeks we have seen numerous forecasts for metallurgical coal pricing for the April – June quarter, with some estimates as high as $400 – 500 per tonne, although this has raised a few eyebrows.

Last week,  at the McCloskey US Coal Conference in Miami, we saw the first meaningful  industry comment – from Xcoal CEO Ernie Thrasher,  indicating $300 – 320 as an expected range for the April – June settlement.

Those numbers should prove to be very close to the final settlement; we can certainly expect to see at least $300 per tonne, reflecting 2008 pricing and mirroring the supply tightness created at that time by the previous round of Queensland flooding.

So. How much more than $300? – well, perhaps an extra $25, as producers want pricing to properly reflect  the current tightness in the market, which is far worse than the tight supply seen in 2008.

Anything over $325 may only be on the table if the steel mills see continuing improvement in hot rolled coil prices, which over the last 3 months have risen from $670 (in late November, when the current coking coal price of $225 was struck),  to current levels around US$820 per tonne.

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