Hard on the heels of Friday’s deal with a Japanese steel mill for a 50% price rise for hard coking coal, BHP Billiton has revealed the settlement of 2010 deals with other buyers in China, Europe and Japan.
Friday’s settlement at $US200 a tonne for three months from April 1 with JFE Steel looks like it has been the model for other agreements.
Big Australian exporters like Xstrata, Wesfarmers (Curragh), Rio Tinto, Macarthur Coal, Anglo, Peabody and big competitors in South Africa, Canada, Indonesia and the US will now all price their contracts off the BHP settlements.
The news boosted BHP shares by just over $1 a share to $43.51 yesterday, a rise of 2.3% on the day.
Rio shares jumped $1.93 or more than 2.5% to $76.94, dragged higher by BHP’s news.
The deal will flow on to soft coking coal, which sells at discount to the higher quality hard coking coal, which is in high demand at the moment because of global shortages.
BHP said in a short statement that "it had reached terms for a significant portion of its hard coking coal volumes for 2010, based on a structural change to shorter term market based pricing for the contract period.
"The company has reached agreement with a range of customers throughout Europe, China, India and Japan.
"These settlements reflect the company’s commitment to achieving market clearing prices over time across all its bulk commodities."
No mention of price, but it is believed the JFE settlement arrangement is being repeated.
BHP did not put a figure on prices or quantify what the "significant portion" of its hard coking coal contracts was.
If the price rise of $US71 a tonne (from $US129 for the year to March 31 to $US200 a tonne for year from April 1) is repeated across all hard coking coal contracts, BHP could see its revenues jump by $US2 billion or more in the 12 months.
The sharp increase in coking coal along with rising iron ore costs is set to push up steel prices, possibly by around 30%. Chinese steel industry figures yesterday warned this, plus impending big iron ore price increases could cause price pressures in the Chinese economy.
BHP’s announcement however is more significant than just on price.
It means the company’s campaign to move to short term pricing arrangements is succeeding. There is no mention of long term contracts in the announcement.
Just "a structural change top shorter term market based pricing for the contract period". And there was another phrase in the statement of significance:
"These settlements reflect the company’s commitment to achieving market clearing prices over time across all its bulk commodities."
Taken together it means the company has won agreement from some of the world’s biggest steel companies for short term pricing contracts under which price, rather than volume will be important. Prices will rise or fall to remove any overhang on the market or correct supply-demand imbalances.
BHP was able to reach this deal because of the short supply of hard coking coal, especially in the Asian region. Iron ore is also in tight supply.
The buyers will be waiting to see if the higher prices bring more supply, which will in turn put pressure on BHP to cut its price in the next three month period.
In its December half year report BHP said that underlying earnings before tax and interest from its hard coking coal business fell to US$772 million, "a decrease of US$2,351 million or 75.3 per cent from the corresponding period.
"This decrease was mainly due to the lower realised prices for hard coking coal (50.0 per cent), weak coking coal (54.6 per cent), and thermal coal (30.5 per cent). Performance of carryover volumes from the 2008 contract year (Japanese Financial Year) partly offset the price decrease.
"Record quantities of coking coal were shipped in the half-year in response to stronger market demand.
"In addition, operating costs were lower due to full recovery from rainfall events at Queensland Coal and improved mining conditions at Illawarra Coal. However, a stronger Australian dollar against the US dollar had an unfavourable impact of US$391 million on Underlying EBIT."
The price rise will go a long way to boosting earnings in this business, and will flow on to soft coking coal as well.
