Negotiations Exit from Quarterly Coking Coal Price Settlements, Spot Indexes Come in
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Eventually, the 45 year old negotiation based Coking Coal quarterly contract pricing mechanism has ended.
Coking Coal contract prices were the quarterly price settlements for the coal type as agreed between Australian coal miners and Japanese steel makers. As a matter of fact, the agreed quarterly prices were regarded as the benchmark prices for the coal across the world.
In a recent move, Nippon Steel & Sumitomo Metal Corporation--the largest steel producer in Japan--has decided to shift to index-based pricing mechanism from mutual negotiations with Australian miners for setting quarterly contacts for purchasing Coking Coal from the current quarter onwards, thus ending a more than four decade long tradition due to the losses incurred from the drawback of the erstwhile pricing mechanism.
The quarterly price settlements involved negotiations between the steel makers in Japan and coal miners in Australia for every quarter before hand. As Australia is prone to occasional supply disruptions on account of natural calamities, prices of the coal rises abruptly every now and then--resulting in the steel makers sustaining high raw material costs, which in turn impart volatility in prices of steel products.
In essence, thoughts to move away from the negotiation based quarterly price contracts surfaced after the recent Debbie cyclone in Australia that had caused severe disruption in Coking Coal supplies, triggering abrupt price rises.
In the new pricing mechanism, the Japanese steel producer will set prices for the coal for the quarter on the basis of the average of the daily price indexes published by Platts and Argus Media. Behind the shift in the pricing methodology, other factors, such as the majority of global Coking Coal buyers and sellers depend on spot price indexes in their purchases, apart from China's Coking Coal output policy also were taken into consideration. However, the spot price indexes are also impacted by supply disruptions.
Source: CoalMint Research
