Coal Price Surge Squeezes Steelmakers' Profits
7 October 2016
The coal used to make steel, known as metallurgical or coking coal, has flummoxed pundits by emerging as the best performing global commodity so far in 2016 after years in the doldrums, with benchmark spot prices surging by more than 250%.
The soaring price of metallurgical coal, steel's second biggest ingredient, is hitting the margins of steelmakers in Japan and South Korea. These manufacturers have already been hurt by an abundance of cheap Chinese steel and the rising price of iron ore, steel's main input.
Mining restrictions imposed this year in China have helped push up prices, but authorities moved to relax some of those on Sept. 30, to help staunch any further rises.
Metallurgical coal spot prices for premium coal in Australia began the year at $77.50 and soared to $213. 40 by Oct. 4, according to Platts' The Steel Index, reaching its highest point since 2013. The Hard Coking Coal Index has also risen by 230%.
The effects of surging metallurgical coal prices have immediately been felt by Chinese steelmakers, who typically buy coal at spot prices. But the Chinese production cuts and increased imports have forced up prices for the rest of the world.
Mills in Japan and South Korea still use a hedging system that fixes prices for three months. This brings them certainty, but given the surge in coal prices, the next three-month price could be set at nearly double the current $92.50 per metric ton for premium coking coal, analysts estimated.
Japanese steelmakers including Nippon Steel and Sumitomo Metal, already hit by increasing cheap exports from China, are warning that such a rise in coal prices would have an impact on their margins. Japanese mills are already suffering from a strong yen.
Japan is the world's biggest buyer of metallurgical coal, importing 54.1 million metric tons in 2015, according to Morgan Stanley.
Nippon Steel & Sumitomo Metal's group pretax profit will likely drop 10% for the year ending in March, the company said. In July, it reported that for the April-June quarter, sales slipped 2% to about 4.8 trillion yen ($46.22 billion) from a year ago. That figure had not factored in the full extent of the coal price surge.
The main driver of events -- as with so many commodities -- is China, the world's largest steelmaker, and its overdue efforts to control domestic coal production and its inability to curb steel production in any meaningful way.
Source : nikkei.com