Material Matters: Coal Contracts, Stainless Steel And Oil Prices

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By Chris Shaw

Prices for December quarter coal contracts have been announced, with settlements for seaborne Hard Coking Coal (HCC) and low volatile pulverised coal injection (LV-PCI) between key producers and Japanese steel mills been agreed.

BHP Billiton ((BHP))-Mitsubishi Alliance and Japanese steel mills agreed to HCC prices of US$209 per tonne fob, a fall of 7.1% from the September quarter contract price of US$225 per tonne fob. As well, UBS notes at least one Queensland producer has settled on an LV-PCI contract price of US$147 per tonne fob. This is a fall of 17% from September quarter prices.

In the view of UBS, while the prices are lower than in the previous quarter they are still good outcomes for producers, as the October-December period is typically a seasonally weak trading period. The next round of talks for quarterly prices is scheduled for late October-early November.

BA Merrill Lynch was a little surprised by the price settlements as it had forecast outcomes of US$190 per tonne for HCC and US$150 per tonne for LV-PCI. It notes semi-soft coal is yet to settle, but with ample supply and weak demand at present ,BA-ML suggests price pressures remain to the downside in this category.

Having factored the contract outcomes into its model, UBS has set out its coal price forecasts for coming quarters. For HCC it expects prices of US$200 per tonne in the March quarter of 2011, US$210 per tonne in the June and September quarters and US$200 per tonne in the December quarter of next year.

For LV-PCI, UBS is forecasting quarterly prices of US$160 per tonne in the three months to the end of March, US$170 per tonne for both the June and September-end periods and US$160 per tonne in the final quarter of 2011.

BA-ML is more optimistic, forecasting average prices in 2011 of US$220 per tonne for HCC and US$178 per tonne for LV-PCI. For semi-soft coal BA-ML is forecasting an average price in 2011 of US$158 per tonne, while UBS has quarterly forecasts of US$150 for the March period, US$165 per tonne in the June and September quarters and US$150 in the December period of next year.

With respect to the stainless steel market, industry consultant MEPS expects prices will dip in the final quarter of this year before recovering in 2011. The group sees a slight pick-up in demand as possible in coming weeks now the northern hemisphere summer holidays are over, while it also notes mills worldwide are planning to control output to re-balance supply somewhat.

In the view of MEPS, these measure won't be enough to sustain prices. Some of the recent financial stimulus that sustained activity in Europe and the US will soon disappear, while falling input costs will add to negative price pressures.

When added to an expected de-stocking in the run up to the end of the calendar year, MEPS expects transaction values will decline in the final few months of 2010. This shouldn't last though as in 2011 MEPS sees an increase in raw material costs, something that should prompt some buying ahead of perceived price increases.

As well, lower production volumes create the potential for some shortages of supply, a situation MEPS expects will see stainless steel values climbing through the course of next year. Price gains are likely to be limited somewhat by the fragile nature of the global economic recovery and the lack of availability of credit in many markets.

Turning to the oil market, Barclays Capital suggests the significance of US$70 per barrel as a sustainable minimum price for the OPEC basket appears to be gaining greater acceptance. This is despite recent renewed interest in the short macro oil trade on the back of a less confident FOMC statement.

As Barclays notes, while the FOMC statement brought out some new shorts, prices only slipped below US$70 per barrel in one session. This suggests there is a growing market perception key OPEC producers are defending the US$70 per barrel level.

Also supportive of this view, according to Barclays, are further signs the supply side of the market is somewhat unmotivated below this level. This has helped prevent prices from correcting further despite ongoing pessimism about the macroeconomic outlook.

Barclays also points out during the most recent price correction implied volatility did rise shortly after the FOMC statement, but this proved short-lived. Unlike a previous price correction in May, volatility quickly returned to previous levels of around 30%, something the group suggests shows market participants don't expect any further sharp price falls.

As well, Barclays notes the put skew in the oil market has started falling in recent days, a trend indicative of lower demand for downside protection at current price levels. The call skew has been rising at the same time, which in turn implies growing interest to position for upside from present price levels.

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