Australian coking coal contract prices fall 58%

UNCLAS CANBERRA 000295 SENSITIVE SIPDIS STATE FOR EAP/ANP; STATE PLEASE PASS USTR/BELL TAGS: ETRD ENRG ECON AS SUBJECT: Australian coking coal contract prices fall 58% ¶1. (SBU) Summary. Contract prices for coking (metallurgical) coal dropped 58% to US$115 from US$300 last year, due to the global economic crisis and depressed world steel production. Coking coal is Australia's largest export commodity, ahead of iron ore and thermal coal. The new price is actually 20% above 2007 levels, but falling contract volumes and prices will contribute to a cut in Australian exports of A$15 billion in 2009-10. A similar fall in iron ore prices is now also expected, with a trade deficit in 2009-10 more certain. End summary. THE NEW BENCHMARK PRICE ¶2. (SBU) Last year, metallurgical or coking coal prices increased sharply because of major floods in the Bowen Basin in Queensland and due to problems with inadequate port and rail infrastructure, all at a time of robust world demand. This scenario contributed to the record US$300 a ton negotiated for hard coking coal in JFY 2008. This month's agreement between BHP Billiton (by far the world's biggest exporter) and Nippon Steel (the world's second largest steel maker) is a probable benchmark for the industry. Their 2009-10 contract price (starting from 1 April) of US$115 to US$125 a ton represents a 58% fall from the previous year, but is the second highest recorded and 20% above 2007-08. The settlement, ranging from US$129 a ton for top quality Peak Downs coal and US$115 a ton for the lesser quality Gregory coal, is expected to be adopted across the industry. ¶3. (SBU) The impact of the 60% cut in 2009-10 Australian coking coal prices will be a A$15 billion cut in export revenues (from A$36 billion in 2008-09 to A$21 billion in 2009-10),according to the Australian Bureau of Agricultural and Resource Economics (ABARE). It follows the A$4 billion export hit for thermal coal exporter and increased expectations that iron ore exports will be reduced 60% in ongoing negotiations, reducing exports by a further A$7 billion. However, volumes could easily be below expectations. Notably, production cutbacks by the largest producer BHP Billiton Mitsubishi Alliance (BMA) will lower exports by 10-15% in the March quarter. Contract prices for iron ore, another key steel input, are now expected to fall by up to 60%. ¶4. (SBU) Australia dominates global coking coal exports, accounting for around 60% of the seaborne trade of coking coal in 2008. ABARE forecasts global coking coal trade will decline by 11% in 2009 but will recover by 2014, when India and the EU will be leading sources of demand. India's imports could rise by 10% a year to 45 million tons by 2014; and EU imports could rise by 4% a year to 64 million tons as Polish and German coal mines are phased out. In recent years, infrastructure limits have thwarted potential exports, but planned expansions to coal infrastructure could overcome this problem and allow export volumes to exceed 160 million tons by 2014 according to ABARE. THE IMPORTANCE OF JAPAN, NOT CHINA ¶5. (SBU) Japan is by far the leading buyer of Australian metallurgical coal, while China is largely self-sufficient in this steel-making material. Japanese crude steel output in February 2009 fell 44% to its lowest since 1968. It could be 20% lower over 2009-10, according to ABARE, down from 51 to 41 million tons. Japanese steel-makers remain concerned about supply security for materials and Nippon Steel probably paid a premium for its 'preferred' coal from the BMA (BHP-Mitsubishi) joint venture at Peak Q'preferred' coal from the BMA (BHP-Mitsubishi) joint venture at Peak Downs when it settled on US$129 a ton as BMA produces the highest grade metallurgical coal in the world. With Japanese steel production at a 40-year low, the Nippon Steel benchmark price was generally viewed as a reasonable result, leading to a 3% boost to BHP's share price. ¶6. (SBU) Comment: The cut in coking coal prices reflects the precipitous decline in Japanese steel output this year and the global downturn, with future iron ore prices to be comparable to coking coal. Leading forecasters such as ABARE expect prices to rise after 2009-10 as world demand recovers. In the shorter term, declining exports will impact on national income, state government tax revenue and the current account. End comment. RICHE