BHP Coal Contract Change Spares Consumers Price Surge

BHP Billiton Ltd.’s push to set coal prices quarterly rather than annually may spare steelmakers from a surge in costs after flooding in Australia disrupted mine production in Queensland state.

“The market can respond far quicker than with the 12-month pricing and buyers will be prepared for an increase knowing they can always renegotiate the next contract,” said Gavin Wendt, a senior resource analyst at MineLife Pty in Sydney. “It’s a more fluid market. You probably won’t see the sorts of huge price movements that we saw a couple of years ago.”

Steelmakers were hit with a threefold increase in annual contract prices to about $300 a metric ton in 2008 after heavy rains and floods affected mining in Queensland. This year, coal production and deliveries have been disrupted after Australia had its wettest September-to-November spring on record. BHP, the world’s biggest mining company, has urged the industry to move to short-term deals to make prices more responsive to market changes. It agreed with Japan’s JFE Holdings Inc. to the first three-month coking coal contract in March.

Coking coal and iron-ore suppliers traditionally held annual talks with steelmakers to fix benchmark contracts for the 12 months from April 1, the start of the Japanese financial year. Quarterly accords mean producers can spread price increases caused by the rain over the course of the year.

“Producers are not compelled to push for higher prices now to offset lost production, like they have in recent years, most notably the super-spike of $300 a ton,” UBS AG analysts led-by Sydney-based Tom Price said in an e-mailed note today. “They don’t have to wait another-12-months like they used to.”

Force Majeure

Production has been disrupted at mines operated by Macarthur Coal Ltd., Aquila Resources Ltd., Vale SA and Xstrata Plc. They have all declared force majeure, a legal clause invoked by companies when they can’t meet obligations because of circumstances beyond their control.

“We’ve moved now to quarterly pricing, in the old days we had annual pricing,” Keith De Lacy, chairman of Macarthur Coal Ltd., the world’s largest producer of pulverized coal used in steel manufacturing, said on Bloomberg Television on Dec. 8. “The market responds a lot quicker to supply and demand.”

BHP agreed with Japanese steelmakers to cut coking-coal prices by 7 percent in the three months ending Dec. 31. Kobe Steel Ltd. will pay $209 a metric ton, from $225 a ton in the quarter from July to September, Hiroyuki Hashimoto, a spokesman for Kobe Steel, said Sept. 1. JFE Holdings’ steel unit reached the same agreement, the company said.

Fiona Martin, spokeswoman for BHP, declined to comment on what percentage of the company’s coal contracts are settled on a quarterly basis. BHP Billiton-Mitsubishi Alliance, known as BMA, is the world’s biggest exporter of coal for steelmaking and operates seven mines in Queensland’s Bowen Basin.

Consumers Concerned

“All our readings of the consumer side is that they’re very concerned about making sure that they have enough supply,” Andrew Harrington, an analyst at Patersons Securities Ltd. in Sydney, said Dec. 7. “This year has been unusual because we had a fair amount of rain up in the inland of Queensland in August and September, which is usually the dry period.”

Queensland’s coal exports are worth about A$100 （$99 million） a day to the state, Michael Roche, chief executive of the Queensland Resources Council, said Dec. 7. “Some open-cut pits are now looking more like dams than mines,” he said.

Australia is the largest producer of coal used in steelmaking, contributing more than 40 percent of the global seaborne trade, Deutsche Bank AG. said Oct. 19. The country is the second-largest exporter after Indonesia of the commodity burned for power.