Japan's largest steelmaker, Nippon Steel & Sumitomo Metal Corporation, has adopted indexation to price premium coking coals for April to June, effectively ending a quarterly price system that has been in place since 2010, sources said Monday.
A spokesman from the company also confirmed the news to another media source and this has been verified by other market participants including buy and sell-side sources.
Much of the sharp shift towards indexation has been triggered by the extreme price volatility of metallurgical coal pricing after cyclone Debbie hit Queensland, Australia, on March 27, with prices doubling to $304/mt FOB Australia on April 17 before plunging to $147.50/mt FOB Australia Friday, based on S&P Global Platts Premium Low Vol FOB Australia.
The buyer and suppliers could not reach to mutual agreement on what the Q2 price would be and this resulted in a move towards indexation, sources said.
The pricing formula is using the average of March to May pricing of premium coal indices.
Most of the contracts heard were using the average pricing of S&P Global Platts Premium Low Vol FOB Australia and TSI Premium Hard Coking Coal FOB Australia while there was one with a basket of the above two with a third index.
Platts Premium Low Vol FOB Australia averaged at $193.26/mt FOB Australia while TSI's Premium Hard Coking Coal was at $194.32/mt by using an average of the daily assessments from March to May.
TSI is owned by S&P Global Platts, part of S&P Global.
There appears some uncertainty whether the indexation move is to solve the short term dilemma of Q2 or a permanent change, although most sources indicated that it was more inclined to the latter.
BROADER CONVERSATION
One miner said it was more of a "long term" thing. Another source said whether it is permanent would become clear as the Q3 price negotiations is about to start soon given July is approaching.
"We will know in two weeks when Q3 starts," the source said.
But not all suppliers appeared to have agreed to using indexation, two sources said, with one Australian producer understood to be still willing to negotiate a fixed price outcome.
In addition, PCI and semi-soft coals were understood to be not going down the indexation route, with sources indicating they would be using the index price settled for premium coals and applying a ratio to it.
Several other Japanese mills were heard due to meet miners as early as Tuesday to follow up on their own discussions.
Several sources said they believe other mills would follow suit. But one mill said there might be hesitation on its part.
"We will discuss which way to proceed, whether to follow Nippon's way or the traditional benchmark. It is not clear now," he said.
The steel mill buyer also said this is bound to affect mills' pricing strategy in terms of downstream steel sales, as mills also sell based on quarterly benchmark system.
"It is sure to affect steel pricing, and I'm not sure if this is a good thing or not," said the buyer, adding that the decision on steel pricing would have to involve a larger conversation with steel customers as well.
Two participants said this would aid the burgeoning swap derivatives market as steelmakers would have a greater need to hedge raw material costs.
One steelmaker said that should steel pricing strategy still remain on a longer term basis, the only way for them to control volatile raw materials costs is through hedging on the paper market.
Both Platts and TSI's premium coal index are listed as financial derivatives, with the former at CME and the latter at SGX.
SGX's paper contracts has a lion's share of the swaps derivative market in 2017. Around 7.2 million mt of coking coal futures were traded at SGX from January to May as compared to 0.94 million mt at CME. CME volumes stood at 4.74 million mt in 2016 while SGX paper volumes were at 0.8 million mt.
"Swaps market will become more active," a sell-side source said.
It appears now that the whole ferrous raw materials complex has shifted towards the indexation path after iron ore fines made that switch in Q2, 2010.
Iron ore lump made the move in Q2, 2014 as a result of the spread between spot and contract prices widening.
