BRISBANE, Australia -- Demand side changes are the key. A less hawkish approach by India’s state-controlled steel sector - and the emergence of some genuine end-user demand for top-tier product in China - have sown the seeds of a possible shift in sentiment.
While it’s early days, events in India and China have gone some way to removing a glaring anomaly that has relentlessly pounded price levels for more than a year – heavy spot discounts against quarterly and monthly benchmarks.
The previous April-June quarter (Q2) FOB benchmark headline, at $172/t, was mostly a product of a brief spot price blip earlier in the year. With spot prices then tanking, the benchmark quickly reached an unsustainable premium of around $40/t over FOB netbacks available for sales into China.
The early Q3 picture is much closer to benchmark/spot balance. With India’s SAIL and RINL (Vizag) largely following the BHPB-Nippon Q3 FOB benchmark headline of $145/t, the gap to spot has now been recognised – and slashed - in the largest volume Asian markets.
Meanwhile, spot sales into China – the most influential spot market - have broadly held their ground so far in July at CIF levels around $142/t, netting back to $130-132/t FOB for top tier hard coking product.
And this week, reports have emerged of one major steel industry buyer paying approximately $146/t CIF, netting back to around $136/t FOB, to a major Australian seller with access to favourable freight.
Given recent experience, this may turn out to be aberrant. But at that level, Chinese FOB spot prices are much closer to Q3 contract benchmark levels, i.e. within $10/t of the Q3 benchmark headline.
The gap is even smaller against levels understood to have been agreed by BHP Billiton last week in India for August-priced deliveries at $141/t for premium product.
But this convergence of spot and contract pricing still has some cynics underwhelmed.
“I’ll agree the trajectory of decline has flattened,” said one “But it’s still a big call to use the recovery word.
“If you look at how much (coking) coal is being shipped, especially from Australia and Canada, there’s still plenty of it around. The buyers know that and they’re still looking at over-supplied steel markets, so they’re still going to play hardball.”
The comments are backed by continued reports of low-ball pricing, with Indian sources still indicating GlencoreXstrata is offering Oaky Creek product at sub-$130/t FOB levels.
Hard coking coals outside the top two tiers are also said to be transacting into China at netbacks as low as $125/t FOB, with semihard brands $5-6/t lower.
“It’s hard to see a real turnaround when there are still some distress sellers out there, but I’ll grant you the price premium for volume and reliability has been disappearing. That’s often a sign the bottom is close.”
But for the sellers it’s a dubious gain. The benchmark is being dragged down to spot levels, not the other way round. There’s no rule that says it can’t just all take another leg down. Probably, stopping the rot is about the best the sellers could expect for now.”
Meanwhile, as indicated, BHP Billiton is understood to have begun settling August priced tonnage to Indian customers at an FOB headline of $141/t for premium Peak Downs material and $138/t for Goonyella brand.
The deals, part of still emerging information from last week’s marathon meetings with Indian state-controlled steel makers SAIL and RINL (Vizag), represent a discount of $6/t on prices settled last month by BHPB for July priced deliveries.
That July pricing was sealed mostly as part of BHPB’s quarterly process with Japanese and South Korean steel mills, which also settled July-September (Q3) benchmarks at $145/t for Peak Downs and $142/t for Goonyella.
As previously reported by McCloskey’s Newswire, BHPB is understood to have just days ago made initial August-priced FOB offers into Europe at $143/t for Peak Downs and $141-142/t for Goonyella.
While this continues to draw strong push back in Europe, BHPB is understood to have almost simultaneously moved to settle August pricing in India as part of Q3 contract talks under the umbrella of the EJC, India’s government/industry met price policy body.
After some EJC horse-trading, BHPB was able to settle its suite of Q3 contract tonnage with SAIL and RINL, plus settle for August priced deliveries in a way that sources believe will likely be accepted by most private sector Indian steel makers.
SAIL has also made concessions which appear aimed at holding onto its US suppliers. They have won an improved deal for July- September quarter (Q3) contract deliveries, but will still have to supply at a significant discount to the Asian hard coking coal benchmark, according to sources.
They say SAIL’s two US suppliers - Alpha and James River – have won the right to match the landed cost of Australian coal for Q3.
However, US producers are understood to have supplied scant tonnage in recent quarters and their level of likely shipments in the current quarter remains in doubt.
Meanwhile, New Zealand’s Solid Energy is understood to have negotiated a similar deal, but the applicable freight differential is around $5/t.
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