Quarterly coking coal discussions coming up: a look-back at events over the last quarter that will frame negotiations.

1. © Copyright The Steel Index 2015 /1
TSI Market Watch: Coking Coal June 10, 2015
Quarterly negotiated benchmark price defies long running demise predictions… for now
Executive Summary
 Parties are limbering up for their ritual quarterly self-flagellation exercise.
 Meanwhile a resumption of Chinese demand has stemmed, then reversed, falls in CFR China and FOB
Australia prices. China has been notably absent from the seaborne market recently, being only
Australia’s 3rd
largest customer in December, January, February, March and April – behind India and
Japan.
 In the background, continual price falls have begun to cause serious discomfort to miners, after
multiple rounds of cost-cutting exercises have left less room for further efficiencies and the policy of
amortising costs over as many tons as possible has exacerbated oversupply: particularly in the
relative absence of the China market.
 This has manifested itself in successive announcements by Glencore, Teck and Peabody of intentions
to idle mines in order to trim overall supply to the market.
 Wide acceptance heard that the last set quarterly price was ‘damaging’ to that pricing system, given
subsequent spot price divergence of over US$24/tonne. Yet, at the time of setting, there were some
recriminations in the market with a perception that it was at an overly low level!
 Overall volumes across CME Group and Singapore Exchange (SGX) have risen by +26.3% in January-
May in 2015, compared with 2014.
 After the double-whammy of falling prices and rising currency strength in May, the greenback is
pulling away from the AUD again, to the relief of producers.
Cuts on the horizon
Peabody is the latest metallurgical coal producer to announce a production
curtailment, indicating it will be lopping off almost 40% (1.5 million tonnes) of its
annual North Goonyella production tonnage. That follows Teck’s announcement
of a similar figure from planned temporary idling of six mines only last week. In
turn, that comes on the heels of Xstrata’s planned reductions. One market
participant scathingly remarked “This sums to nothing” about the effect of the
cuts. Whilst some cuts are announced, other capacity is coming online.
With Vale’s Moatize moving on up to 22 million tonne per year output and the
rail and port almost ready, the last week’s announcements of 1.5mtpy cuts in Oz
and Canada may not quite cut it.

2. © Copyright The Steel Index 2015 /2
It does, however, point to the distress being felt by producers in the sector as production economics bite.
The primary question for the market is how the US and domestic Chinese miners are faring in this low-
price environment. Certainly China’s thermal sector is feeling pain all round.
These cuts could have a bolstering effect on producers negotiating positions for quarterly discussions,
particularly as these announcements come on the back of a turnaround in spot prices. A high settlement
and subsequent fallback in spot prices, however, could spell the death of the benchmark – as the last
round caused significant distress for buyers seeing spot prices diverge from the benchmark by more than
–US$24/tonne.
Long fall for spot & quarterly prices
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Quarterly PHCC FOB Index vs Quarterly (RHS) TSI PHCC FOB Monthly Average
From buyers, the Quarterly system has been a negative proposition for
much of the past 30 months, compared with index options.
US$/t US$/t

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Goldman Sachs recently cited the leading Indian steelmaker as having signed its first index-linked
contract as another symbolic blow to the increasingly creaky-looking negotiated quarterly benchmark
system. Other miners, while far from enthusiastic, are reported to be preparing for an indexed world.
When the upside comes, miners will be able to see upside, without customer rancor. Perhaps more
importantly, it will help to align global BOF steelmaker input costs: crucial in a time of continual
competition with imports. The market has been on a continual downward run for a number of years,
putting the steel industry back into a cycle of searching for maximum efficiency.
Ultimately, unless the production cut moves are followed by other producers, it is a classic case of
‘prisoner’s dilemma’ for miners that do choose to cut output. Coking coal has the distinction of far
greater industry concentration, however, when compared with the eternally fragmented steel market.
The CME and SGX FOB Australia forward curves have converged to around 25 cents of each other out
through Cal’ 2016. Furthermore, as the basis of many index-linked FOB contracts in the physical market
have recently migrated to TSI, companies wishing to hedge on SGX are now provided with the
opportunity to do so without incurring basis risk.
After-party slow grind (down)
Ignoring the huge 07-08 run up in prices, prices have been being ground
downwards for a number of years, particularly since 2012. TSI’s ASEAN price
leads all markets lower (it is a 99% correlated FOB China proxy).
Global steelmakers seeking every efficiency in the face of shrinking margins.
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Indexed Global HRC Price Average
(Equally weighted index of ASEAN, N. European, USA and Turkish HRC prices.)

4. © Copyright The Steel Index 2015 /4
Whilst the forward curve is giving nothing away, the current market does appear a little ‘inscrutable’.
The key question is whether the returned Chinese demand seen in May will prove resilient. If China’s
import tonnages resume a more gentle easing than the brutal drop seen in April, the market may be on a
slightly firmer footing moving forward.
A pancake-like forward ‘curve’
CME & SGX FOB Australia forward curves are striking in their flatness. They are
currently within 25-50 cents of each other through till the end of 2016.
No recovery is being priced in from todays levels, with the consensus appearing
to be a long continuation of the status quo in today’s market.
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CME FOB Forward Curve SGX FOB Forward Curve
US$/t
The spot market was largely flat over the course of May, with an uptick seen at
the end of the month. The beginning of a rise/bottom of the market?
Before everyone pulls bunting out: January looked very similar, too…
US$/t
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02/01/2015 02/02/2015 02/03/2015 02/04/2015 02/05/2015
PHCC FOB Aus PHCC Monthly Average 30 day MA
Past no guide to future performance

5. © Copyright The Steel Index 2015 /5
Recent history has not painted a pretty picture in terms of Chinese import demand. However, seaborne
prices are no longer at the level of March (when CFR China prices for the month averaged US$108.50/t).
Australian material has proven highly competitive at current levels against the domestic Chinese miners
output – which is what stoked the resumption of buying over the course of May. So, what is the appetite
among miners to supply at current levels?
For further information
Please contact: Tim Hard (Singapore) +65 6530 6413 hard@thesteelindex.com
Jing Zhi Ng (Singapore) +65 6216 1056 jz.ng@thesteelindex.com
Note to Editors:
The Steel Index (TSI) is a leading specialist source of impartial steel, scrap, iron ore and coking coal price information based
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Transaction price data is submitted confidentially to TSI on-line by companies buying and selling a range of relevant steel,
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6. © Copyright The Steel Index 2015 /6
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