Developments in steel market likely to determine the extent of shift.
With the two leading Australia-based global miners, BHP and Rio Tinto, contemplating a move to quarterly contracts from annual ones, many Indian coking coal producers and consumers believe prices will move up significantly.
Some even suggest these will move past the 2008 record level of $300 a tonne, perhaps as early as June. However, others dispute this. Currently, BHP, the world’s largest producer, is negotiating with buyers to switch its price fixation to a quarterly contract system. “The change will lead to higher speculation on expiry of every contract and thereby help rising prices in tandem with market sentiment,” said Ganesan Natarajan, president and chief executive officer, Ennore Coke, a domestic manufacturer of metallurgical coke, which uses imported coking coal as the raw material.
“Longer the contract period, lesser the price volatility. Speculators will get huge opportunity to play in the shorter version of contract period which, according to my view, will help prices hit the historical high of $300 a tonne as early as the end of next quarter, that is, June 2010,” he added.
The Indian government is targeting 200 million tonnes (mt) of steel production by 2020 from the current level of about 60 mt, which would require additional coking coal.
Also, China’s steel production is estimated to surpass 600 mt this year from 567.8 mt in 2009, backed by enormous infrastructure development. Therefore, a return of the 2008 level cannot be ruled out, said Arun Kumar Jagatramka, chairman and managing director of India’s largest coking coal producer, Gujarat NRE Coke.
Approximately 630 kg of coking coal is used for every tonne of steel produced. Therefore, a proportionate increase in coal demand is expected with higher estimated steel production. Coking coal prices rose by 80-100 per cent in the past year, as the steel industry globally bounced back from last year’s economic recession, with demand from the infrastructure sector growing by leaps and bounds. Poor quality coking coal is currently quoted at $150-155 a tonne from $78 a tonne a year earlier.
“Coking coal prices hit the $300 per tonne mark in mid-2008, due to strong global demand from the steel sector. The prices crashed to $130 a tonne subsequently, as commodity prices declined during the global slowdown. The offtake and prices have started firming up again, with revival across all steel consuming sectors, in response to recovered GDP growth in developing countries. Whilst the general sentiment is now bullish, developments in the global steel market will continue to guide coking coal price movements in future,” said Kameswara Rao, executive director of PricewaterhouseCoopers, the global consultancy.
Coking coal imports by China are projected at 25.5 mt this year, a 269.6 per cent jump over 2008. The surge is attributed to a dip in the country’s domestic production, as it plans to close more than 4,000 small coal mines by 2010 to improve safety and drive consolidation in the sector.
Coal India chairman Partha S Bhattacharyya, however, considers the $300 a tonne level unusual. “Unless a crisis prevails, the price does not look to hit this level in the near term,” he said. Coal India supplies about 25 per cent of coking coal demand of the Steel Authority of India Ltd (SAIL) and Rashtriya Ispat Nigam Ltd (RINL).
India produces 22 mt of metallurgical coke against the annual consumption of 28 mt, while the rest is met through import. Gujarat NRE is working to raise its annual coking coal production capacity to 6 mt in three to four years, from the current level of 1.5 mt.
