Deluge of luck
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BHP's deluge of luck
Stephen Bartholomeusz
Published 11:49 AM, 31 Dec 2010 Last update 5:10 PM, 31 Dec 2010
The Queensland floods are causing trauma and devastation in that state. They’d also be the cause of some furrowed brows in Japan, China and India.
Most of the big steel mills have just wrapped up negotiations for their first quarter coking coal supplies, agreeing to an eight per cent rise in the price to $US225 a tonne for the first quarter of 2011 – about a 75 per cent increase in the prices paid in the year to March.
With BHP Billiton, Rio Tinto, Anglo American, Xstrata, Wesfarmers and others having declared force majeure on the contracts they have with mills to supply them from their Queensland mines, the mills are facing severe and potentially prolonged disruption to their supplies that may force them to have to source their coal from more expensive producers elsewhere. Heavy rains in Queensland earlier this year had already disrupted production.
Queensland, notably the Bowen Basin producers, accounts for about two-thirds of the global seaborne trade in coking coal and the affected Queensland mines something approaching half that trade.
The lost production inevitably means the price will rise further in the second quarter of 2011, with most analysts expecting it to push up towards $US250 a tonne, with some prospect of the price of premium coking coal subsequently rising towards the $US300 a tonne level it reached after heavy rains flooded BHP’s Queensland mines in 2008.
The mills have already experienced steep – 40 per cent-plus – increases in the cost of their iron ore requirements this year, as well as finally succumbing to BHP’s long-running campaign to shift iron ore pricing from annual benchmark pricing negotiations to more market-related pricing.
BHP, which is the dominant coking coal producer, has been quietly waging a similar battle in the coking coal market, with some success. It has shifted the pricing to a quarterly basis. That hasn’t, however, satisfied Marius Kloppers, who is keen to see the market moved gradually to near contemporaneous market-based pricing.
As in iron ore, the mills have been resisting the BHP push but the floods, coming after the earlier rains disrupted supply, rains have tilted the negotiating table towards BHP.
In such a production-constrained environment, customers who don’t agree to BHP’s demands risk either paying an even bigger premium or, in the worst-case outcome, loss of access to supply.
The wild card in the relationship between the producers and the mills is China’s economy and the impact that Beijing’s determination to bring inflation under control – evidenced by the Christmas Day interest rate rise – might have on its growth rate and its consumption of iron ore and coking coal. It imported about 40 million tonnes of coal this year.
If China’s economic growth rate were to slow from the high single-digit levels it has traditionally pursued and maintained to mid-single-digit numbers, or it were successful in shifting the balance of that growth from investment to consumption, it could re-write the outlook for iron ore and coal demand and prices.
In the near term, however, once they are able to resume full production, it is the Bowen Basin producers who will have the upper hand in future negotiations.
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