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Pressurised by low seaborne coking coal prices, producers including Alpha Natural Resources have offered fixed prices to customers for 2014 in a move away from the shorter-term pricing model being adopted by many in the market.
Major Australian coking coal producer BHP Billiton Mitsubishi Alliance (BMA) moved to short-term coking coal sales contracts in 2010, following its break with the historical annual pricing mechanism in the iron ore market.
“I have been told by two customers that Alpha is looking to make these sales,” a European trader told Steel First.
The price of premium hard coking coal sold on a cfr Jingtang basis has dropped from levels of just under $160 per tonne in early November to under $149 per tonne in mid-December, according to Steel First indices.
European mills buy coal from a wide range of producers, including those operating in Russia, Australia, Eastern Europe and the USA.
US miners offer mills a range of pricing terms, including annual, six-month, spot and tenders. Sources speaking to Steel First said that US producers were offering a higher-than-expected proportion of their output on annual pricing terms.
“It is a sort of hedge for the US producers,” a raw materials purchasing manager at a major European steel mill said.
“Even if prices do increase then at least they will have locked in a minimum. They are happy to survive at the moment and to have that hedge,” the purchasing manager added.
US mills using longwall mining techniques and under pressure to produce from take-or-pay logistics arrangements, are less likely to cut back production in the face of falling prices, the trader said.
“They are more likely to quietly offload tonnes into the market than cut back production,” the trader added.
While some European steel mills, like Tata Steel, have been outspoken about their preference for fixed-term annual contract pricing, most buy coking coal on a range of different pricing terms.
A second coking coal buyer said that the move to offer more material on a long-term fixed price basis by US producers was driven by expectations that prices could drop further, and that while the fixed-terms contracts sounded attractive, the level that prices were to be set at had not yet been discussed.
“We have been approached and will make decisions on buying in mid-January. It depends what sort of offers are made by producers,” the buyer said.
Although seaborne coking coal prices have shown little strength in recent months, an uptick in iron ore prices in early December coupled with positive revisions made by several banks to their Chinese steel output expectations for early 2014 has led some market participants to become more bullish about the short-term future of coking coal prices.
“There are some positive signs out there,” a second trader said. “It’s the start of the rainy season in Australia and Chinese steel prices are defying people’s expectations.