Miners relieved as Coal price contract comes in above spot prices

Steelmaking coal prices have been plunging over the past year, forcing companies to cut production or shut mines permanently. With the market remaining stubbornly oversupplied, there was some concern in the market that contract prices in the third quarter could be really bad.

So there was some relief this week when a key benchmark contract was settled at US$93 a tonne, in line with many forecasts. That was down 15 per cent from the second quarter — and nowhere close to the highs of more than US$200 a few years ago — but it’s not a total disaster.

The US$93 price is several dollars above listed spot prices, according to Desjardins Securities analyst Jackie Przybylowski, and is proof that buyers are willing to pay a premium for a guaranteed supply of high-quality product.

“Because we anticipate buyers will continue to value the high product quality and assured supply from the prime hard coking coal benchmark, we would expect that the benchmark will remain rela- tively flat over the next few quarters,” she said in a note.

There was another key event in the steelmaking (or coking) coal market this week, as Australia and China signed a landmark free-trade agreement. As a result, China is expected to remove a three-percent import tariff on Australian coal, which could increase imports.

But Jessica Fung, a commodity strategist at BMO Nesbitt Burns, warned it is not as simple as that. Coastal steel mills in China would benefit from cheaper imported product, but she said inland steel mills still buy the vast majority of their coal from domestic producers, and remain “captive” to them.

Fung is optimistic about the coking coal market in the long term. She noted there are few growth projects in the pipeline, and steel demand should continue to grow from emerging economies. Also, China’s steel industry should continue to move toward coastal regions, which is bullish for coal imports.