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| BHP for short supply pacts to cash in on rising prices |
| Ishita Ayan Dutt / Kolkata Jan 29, 2010, 00:51 IST |
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World’s largest coking coal supplier wants contracts renewed quarterly, not yearly, even as Indian imports rise
BHP Billiton, the world’s largest coking coal supplier, is looking to switch from a 40-year-old annual benchmark pricing system to cash in on the uptrend in prices.
BHP Billiton supplies to the international steel industry and is pushing for a quarterly contract. The new pricing system, if it materialises, would directly impact Indian steel producers, as the country imports around 80 per cent of its coking coal requirements.
BHP is negotiating with Japanese Steel Mills (JSM) and South Korean producers, which would be the basis for Indian pricing.
The proposal for quarterly contracts came after China —which turned a net importer of coking coal last year, with the shutdown of some local mines — agreed to these from a spot purchaser. A quarterly contract would mean making the pricing system more market-responsive. In an uptrend, it could more frequently translate into higher prices for steel producers.
Last year, raw material prices had crashed. In the current year, spot prices are at around $200 a tonne, while last year’s contract was sealed at $129 a tonne. The industry expects the contract prices to climb up to $200 a tonne, an increase of 55 per cent over the previous year.
If BHP succeeds, others like Rio Tinto are likely to follow. Steel industry sources said the recession had taught resource owners to cash in on the uptrend.
Arun Kumar Jagatramka, chairman and managing director of Gujarat NRE Coke (which has coking coal mines in Australia with reserves in excess of 500 million tonnes) said it was possible that BHP settled for 50 per cent annual contracts and the balance through quarterly contracts.
Coking coal is half the raw material cost for the steel industry. Against a requirement of 30 million tonnes a year, domestic production is seven million tonnes.
Jayant Acharya, director (sales & marketing), JSW Steel, said it was almost certain a cost push would reflect in steel prices. “There will be some cost impact even in February on account of spot purchases, but between March-April, there will definitely be some price increases. We are yet to take a call on February steel prices,” he said.
It’s not just coking coal. State-owned miner NMDC was also reviewing its iron ore pricing and had appointed consultants. NMDC benchmarks prices on the basis of JSM pricing.
An industry source noted a quarterly contract would cut both ways for the user industry. For instance, in early 2009, SAIL and JSW Steel managed to renegotiate contracts forged in the previous year at a discount of 43-50 per cent, when coking coal contracts were sealed at $305 a tonne and then crashed with the global financial crisis.
However, coking coal for the domestic market would continue to be dictated by global prices, as reserves are about 4.6 billion tonnes. By 2019-20, to meet the steel ministry’s target of 200 million tonnes of capacity, around 160 million tonnes of coking coal would be required, of which 85-90 per cent would have to be imported.
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