Marian Hookham

1. © 2016 IHS Markit. All Rights Reserved.© 2016 IHS Markit. All Rights Reserved.
What follows the
demise of the coking
coal benchmark?
Marian Hookham, July 2017

2. © 2016 IHS Markit. All Rights Reserved.
Overview
• Historical price mechanisms for coking coal collapse
in June
• Index-linked pricing introduced (forced)
• Benchmarks become less relevant, though not
irrelevant. Yet
• Implications different for different producers &
buyers
• As yet not completely resolved
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3. © 2016 IHS Markit. All Rights Reserved.
33
Met reliance on Australia
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Proportionoftonnageprovidedbytopfourexporters
Australia Canada Russia United States
Proportion of metallurgical coal exports coming from the four major exporters
© 2017 IHS Markit
Source: GTIS, IHS Markit

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Overview
• Coking coal priced annually till 2010. Prices set by
negotiation between leading coal producers (usually BHP)
and leading steel mills (usually Nippon)
• In 2009, BHP flags intention to commoditize coking coal.
Quarterly benchmark system introduced in 2010
• BHP leads negotiations with Japanese steel mills and sets
quarterly index until end 2013
• From then on, Anglo (occasionally others) takes lead for
quarterly talks
• Over the last ten years Nippon consistently rejected anything
other than a benchmark

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The lead-up
• In late March 2017, Q2 (April-June) talks nearing conclusion
Friday before Cyclone hits.
• Spot prices are around $155-160/t FOB (PHCC)
• Ports shut, exports stop = negotiations end.
• Despite absence of FOB deals ex-Qld, spot price climbs over
$300. Cargoes on the water or in Chinese warehouses are
sold/onsold to Japan and others to plug gap.
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66
The backstory
NASA image of
approaching
cyclone on 24
March 2016

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Aftermath of Cyclone Debbie
• Event occurs days before a price for Q2 (April-June) is set to emerge
(estimated at $160 FOB)
• Quarterly negotiations suspended
• Spot tonnes from Queensland disappear
• Some 15mt exports lost from Queensland, mostly hard coking coal
• Chinese traders quickly take on role of swing supplier to Asian mills
• Mongolian coal is placed into Japan
• Japanese quarterly benchmark price mechanisms collapse
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Massive price volatility spooks steel makers. Or does
it?
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100
125
150
175
200
225
250
275
300
Australian Prime Hard Coking Coal US$/FOB
© 2017 IHSSource: IHS
Cyclone
Debbie hits
Qld

9. © 2016 IHS Markit. All Rights Reserved.
Benchmark achieves premium historically
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10. © 2016 IHS Markit. All Rights Reserved.
Nippon takes producers by surprise
Nippon proposes new system in May
• From April price to be established through average of spot indices, lagged by 2 months
Q2 (Apr-Jun) price ‘emerged’ at end June in a range between $190-194/t FOB
= provisional pricing for two months
Prime Hard Coal suppliers agree
BUT PCI/semi-soft producers DO NOT
1. The indices for sub categories highly illiquid and not representative of market
2. Historic relativities not captured
3. Provisional pricing a problem
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Confusion over current price setting
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Q1 2017 Q2 (Apr‐June) Q3 (July‐Sept)
Price $285 $192‐195 ?
How Negotiation Average of various indices Average of various indices
When Before quarter start established at end May to be set at end July
Who Nippon/Anglo No leader No leader
Issues Provisional pricing Provisional pricing
Prime Hard coking coal price setting
Q1 2017 Q2 (Apr‐June) Q3 (July‐Sept)
Price $180 $135 $115
How Negotiation Negotiation Negotiation
When Before quarter start
At same time PHCC set for
Q2 Before quarter start
Who Nippon/Nippon Nippon/Peabody
JFE/Peabody. Nippon elects to
wait.
Relativity 63% 69% ?
PCI coal price setting

12. © 2016 IHS Markit. All Rights Reserved.
Confusion over current price setting
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Q1 2017 Q2 (Apr‐June) Q3 (July‐Sept)
Price $171 $126 $107
How Negotiation Negotiation Negotiation
When Before quarter start
At same time PHCC set for
Q2 Before quarter start
Who Nippon/Glencore? Nippon/Glencore
JFE and producers. Nippon
elects to wait.
Relativity 60 65 ?
Seimsoft coal price setting

13. © 2016 IHS Markit. All Rights Reserved.
Current pricing for coking coal
• Benchmark system replaced by index-linked system
• Creating problems for suppliers and steel mills which include:
Provisional pricing and credit risk
Planning and budgeting
Exposure to volatility
How to price additional ‘service’ components (laycan flexibility, single-mine product,
credit terms)
Staff to manage/work with hedging and/or price negotiations
Choice of index
Perceptions about liquidity
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Contact
Marian Hookham Associate Director
marian.hookham@ihsmarkit.com
+61 437783199
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