Supply disruptions, resurging demand, rising prices and new contracting systems have shifted the dynamics of coal markets across the world. How coal miners and their customers respond to these changing circumstances will have a very real impact throughout the economy.
We are now seeing China, and to a lesser extent India, dominate the demand for internationally traded coal as their rapid industrialisation and development require vast amounts of raw materials. China, for instance, is now producing almost half of the world’s steel output, putting ever more pressure on the supply and price of coking coal. Added to this, recent flooding in the Australian state of Queensland severely disrupted coking coal supplies to Asia causing spot prices to peak back towards new record highs.
Seeing an opportunity to benefit from these rising prices, the large global miners have been pushing their customers towards shorter-term contracts. Whereas coal has traditionally been negotiated over yearly contracts, last year saw the majority of contracts settled from quarter to quarter. This trend is being taken a step further with BHP Billiton currently trying to negotiate their coking coal contracts on a monthly basis. However, the steel producers have come out strongly against such short term pricing claiming that it will make it impossible for them to plan and budget for their production cycles. A standoff between these two players is looking likely during the course of 2011.
A further consequence of these booming prices is the record profits being generated by some of the large mining companies. This has led to anticipation within the industry of a renewed round of consolidation as companies look to maximise their bloated cash flows. A recent example was the $8.5 billion acquisition of Massey Energy by Alpha Natural Resources. More merger and acquisition activity can be expected this year.
Although somewhat isolated from these international trends, NWR’s markets in Central and Eastern Europe are being influenced to a certain extent. Coal prices in the region have been rising in response to the international supply constraints while contracting of coking coal has seen some movement towards quarterly pricing. Prices are also responding to renewed economic growth in the region as heavy industry is benefitting from strong export performance, particularly in Germany, with steel production and utilisation rates almost returning to pre-crisis levels. Consolidation within the region is also looking more and more likely as the Polish and Ukrainian governments are eager to continue their economic and industrial reforms through the privatisation of state owned companies.