A large Japanese steelmaker is considering index usage to settle the second-quarter benchmark negotiations after hitting a deadlock late in the quarter, three sources told S&P Global Platts Wednesday, marking a possible landmark evolution in the structure of the seaborne metallurgical coal market from long-term to shorter-term pricing.
Should this occur, and if it is followed by other market players, this would mean that the whole ferrous raw materials complex would have shifted to a large indexation path.
Met coal is the last remaining raw material adopting a quarterly price system after iron ore made the switch several years earlier.
Iron ore fines procurement shifted from quarterly to indexation in Q2 2010, while lump saw the move in Q2 2014 as a result of the spread between spot and contract prices widening.
Indexation for iron ore are based on assessments published by Platts.
The pricing deadlock for met coal has been a result of severe price volatility after cyclone Debbie in Queensland Australia on March 27, with prices doubling to $304/mt FOB Australia on April 17 before plunging to $154/mt FOB Australia Wednesday, based on Platts Premium Low Vol FOB Australia.
Market participants indicated that the large steelmaker was considering using the March-May average prices of premium coal index as its settlement price, sources said. Platts Premium Low Vol price averaged at $196.72/mt FOB from March till May 24.
However whether such an approach was only to be used in this quarter, due to the unique circumstances of the market, or whether it would continue on in the future remains unclear.
One source at a large steelmaker said he had heard that it would be a permanent shift toward index usage, which is similar to the shift in iron ore pricing in Japan.
Another source however heard that this could only be temporary.
Whether this would be a permanent or temporary shift would depend on whether Japanese downstream sales pricing contracts shift to shorter-term pricing as well, unlike the current quarterly price system, one source said.
Sources also indicated that the move need not be universally applied to all of the company's coal suppliers.
A pool of miners was said to be involved in the possible rollout of index usage, two sources said.
"It would be a dual track approach," one sell-side source said, indicating that some miners could still fix a bilaterally negotiated second-quarter price.
There is at least one large Australian miner in Japan to negotiate a fixed price for the Q2 benchmark price negotiation this week, sources said.
It is also important to note that this is not the first time Japanese steelmakers have adopted index usage for their long-term contracts. The difference this time is that mills are considering index usage for their quarterly contract volumes.
IMPACT 'EXPLOSIVE'
Industry players all indicated that, should index usage occur, this would mark a dramatic shift in the met coal pricing structure.
"This is explosive," one mining source said as this would change how Japanese steelmakers have priced their met coal since 2010 when the market moved from annual benchmark pricing to quarterly.
This is a "[benchmark] system breakdown" the source added.
Two participants said that this event would be "bigger than [cyclone] Debbie" should it occur.
In terms of practicalities, one miner said that this could mean that "all contracts have to be renegotiated" and the workflow impact would be "huge."
A buy-side source however said that this could help make pricing more efficient as it could help to "cut out the unnecessarily long debates" in terms of price negotiation.
