JSW Steel flags issues in price discovery process
MUMBAI: JSW Steel Ltd, one of India’s largest steelmakers, has flagged serious issues in the price discovery process of coking coal by Platts, a provider of price and information about energy and commodities.
Platts, part of S&P Global, however, defended its price assessment methodology. Iron ore and coking coal are the primary raw materials used by steelmakers.
Seshagiri Rao, joint managing director of JSW Steel, while not imputing the wrong motive to Platts, claimed that deals between related parties were being included in the reporting agency’s price assessments. This, he said, leads to “price distortion,” as steel makers fix long-term contracts with metallurgical coal suppliers based on the Platts price index for the commodity. “Platts is reported to have a governance framework, in line with Principles for Price Reporting Agencies as published by IOSCO (International Organization of Securities Commissions),” Rao said. “However, it is a matter of concern as it is learnt that the deals between certain coal suppliers and their sister trading companies or trader-to-trader bids and offers with no actual deal are also registered for assessment/ evaluation of reported index price. This is expected to create distortion or misrepresentation in index price.”
Rao commented against the backdrop of Australia FOB coking coal prices falling 63% from a record $670.5 a tonne in
March to $250 per tonne as of 5 December. This assumes importance for steelmakers, as met coal accounts for 35-40% of their production cost and because India is the world’s largest importer of coking coal at over 70 million tonnes per year. At the nub of the issue is the pricing of most of the 300 million tonnes traded each year, aggregating $75 billion at the current market price of $250 a tonne. The pricing of this substantial quantity is linked to the average monthly index pricing reported by Platts. That is, the price for December will be the average monthly price assessed in November and so on.
Around 90% of the 300 million tonnes is sold to steel companies through index-linked contracts by miners such as BHP Billiton, Glencore, and Anglo American, while only 10% is sold through spot contracts. However, it’s the spot transactions, wherein Rao cited the occurrence of related-party deals, forming the basis for long-term pricing contracts.
“Platts’ index prices are computed daily from physical deals if reported, the globalcoal spot platform trades including bid and offers which may not result in any deal (tradable deals), and the market heards (chatter) collected throughout the day,” said Rao.
“Indian steel makers thus don’t have any effective mechanism for hedging their input price risk hurting margins as there is no correlation between Platts index price for met coal and steel prices,” he added.
However, a spokesperson for Platts denied that its assessments included related-party transactions. “We are not aware of transactions between related entities being included in our price assessments for coking coal, and if the companies you are talking to have specific examples or possible instances in mind, we would investigate further.”