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Nippon Steel dumps coking coal benchmark system

13 Jun 2017 11:58 (+01:00 GMT)
Nippon Steel dumps coking coal benchmark system

Singapore, 13 June (Argus) — Japan's largest steel producer Nippon Steel and Sumitomo Metal will move to indexation of its quarterly coking coal contracts using indices including Argus assessments, ending its decades-long benchmark system of bilateral negotiations.

Nippon Steel will use three indices to set its coking coal prices and the change is permanent, a spokesman told Argus.

Other Japanese steel producers including JFE Steel and Kobe steel are now considering whether to follow Nippon Steel into the new index-linked system beginning with the current April-June quarter, or attempt to maintain the current benchmark system for premium hard coking coal with Australian mining firms, sources close to the negotiations said.

Steel producers have been reluctant to implement this change to their feedstocks purchases, but extreme volatility in spot coking coal markets strained negotiations at the end of last year and stalled them this year when prices doubled within a week.

Other steel mills in Japan and South Korea have typically followed Nippon Steel's lead in quarterly pricing and are also eager to resolve the deadlock that has already dragged second-quarter negotiations into mid-June, a Japanese trader said.

"The main issue now is what quotation period to use for the basket of index averages. The general wisdom has favoured a March to May average," a Japanese conglomerate with a stake in Australian coking coal mines said. "We would rather apply the first-quarter, January to March average to the second-quarter contracts, and the second-quarter average for third-quarter contracts and so on, but this is what needs to be decided."

Another Japanese steel producer said the main issue in negotiations for them is not yet which months to include in the three-month average for contract prices, but whether or not a basket of indices will be accepted in place of bilateral price negotiations by all participants.

Japanese steel producers will continue meeting with key mining firms for negotiations this week including UK-South African producer Anglo American, Switzerland-based Glencore and US-based Peabody, sources close to the negotiations said. Nippon Steel said its proposed three-index basket for premium hard coking coal will include indices produced by Argus, as well as Platts and TSI, both of which are owned by US-based S&P Global.

"Glencore has been more resistant to using index prices for the quarterly hard coking coal benchmark, but that may be because they are worried the same system will be used for PCI and semi-soft contracts eventually," a Japanese trader said.

A spokesperson for Glencore declined to comment on quarterly contract negotiations, while Anglo American could not immediately respond to a request for comment.