More splits emerge in Asia quarterly PCI pricing system

Market: Coking coal
31/07/18

South Korean steel producer Posco has settled April-June quarter pulverised coal injection (PCI) contracts at $139.50/t fob Australia for low-volatile Foxleigh PCI. The settlement was reached with Australian producer Realm Resources.

But the agreement has been rejected by a few other northeast Asian steelmakers, led by Japan's Nippon Steel & Sumitomo Metal (NSSMC), which are still pushing towards a lower price. This is despite two months having passed since initial negotiations began, and a month since the quarter ended.

Posco broke from convention to form an independent deal with Realm Resources for the April-June quarter. It has also settled July-September contracts for Foxleigh PCI at the same level of $139.50/t in order to avoid a repeat of the drawn-out negotiations in the next quarter.

"Nippon Steel is not likely to follow the Posco settlement at this moment and is still discussing a deal with suppliers," a Japanese trader said. "But it seems like a good move to delay the settlement since spot PCI prices are falling now."

Fellow Japanese producer JFE Steel has formed its own system of PCI quarterly contract negotiations in the past year, following a more traditional model in which it aims to set prices ahead of the start of the quarter. NSSMC and others have instead aimed to settle by the end of the quarter using guidance from an average of premium hard coking coal index prices.

JFE Steel settled PCI contract prices for the July-September quarter more than a month ago, at $150/t fob Australia with Australian producer Peabody for Coppabella PCI. But Posco, NSSMC and others may benefit from the delays, as spot PCI prices have undergone a correction over the past several weeks, dropping from $143.80/t fob Australia on 22 June to the current Argus assessment of $120/t for low-vol PCI.

"Knowing the settlement price before the quarter begins is always appreciated by the producer and can help secure volumes, but Japanese steelmakers have a lot of bargaining power because they are just a small group of primary buyers," another Japanese trader said.

The continuing talks between NSSMC and Australian PCI producers are focusing on the $135-140/t fob Australia range for April-June, officials close to the negotiations said.

But having three different settlement prices for July-September contracts between the five major Japanese and Korean steelmakers does not augur well for the recovery of a PCI benchmark system, just 18 months after a similar system collapsed in the hard coking coal market to be replaced by indexation.

"The benchmark system has become much too complicated, if we should even call it a benchmark system anymore," the trader said.

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