Coking coal prices: headaches to steel

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Steel prices continue to climb down. The weakness in the market is clearly more than predicted. The reasons are well known. What is worrying the industry increasingly is that coking coal prices may not drop much, or even increase, in the next year's contract, as per forecasts of several researchers.

At one level this can be seen as a ploy of the coal industry to prepare steel makers to accept a higher price. At another, most analysts, commenting on the coking coal prices for the coming year, may have ignored or underestimated the current weakness in the steel market. Lastly, there can still be a genuine shortage of coking coal in the world market arising out of mining capacity and infrastructure constraints.

The steel industry has to prepare itself to face the new forces in the market. It has met with favourable conditions with sympathetic fall in steel scrap and iron ore prices on the spot market. It is certain that iron ore prices will fall in the coming year's contracts. Similar trends will be observed in the prices of other raw materials too. But, coking coal will remain a major headache for the steel makers who depend on them.

At current prices of inputs, the average high cost steel makers produce HR Coils at about US$750. There are many who can do that at US$300 less. The HR Coils prices have fallen to about US$800 or so, on the lower segments, and about US$850 at the higher. It is closing on to the first level of stiff resistance. What looks from the current situation is that this level will be perforated without much of a problem. It will hit those steel makers largely dependent on purchased coal and iron ore resources. What may happen is that the steel prices will fall further and go below the US$700-mark soon. At this level, the production cuts will reduce supply and perhaps the price will be protected.

If there is no demand for steel and production follows the market, there will definitely be a reduction in demand for coking coal. This is simple. But, does the global coal behemoths believe that they have so many waiting in the queue that they do not have to bother about the price any more even in a falling market?