Around a quarter of Australian metallurgical coal is sold on a spot basis following a significant increase in production and the fact that the primary buyer, China, prefers short-term pricing, an analysis of Platts data and a survey of market participants showed.
Spot sales amount to an average of 25% of Australian coal majors' books in 2013. The calculations are based on spot deals observed by Platts as part of its assessment process, metallurgical coal production as published by producers, as well as a survey of market participants.
The size of the spot market can vary according to commodity, but in most cases it is about 10-20% of the whole.
The growing exposure to spot is a relatively new phenomenon in the coal market, which has traditionally been dominated by a longer-term approach to pricing, mostly on a quarterly basis.
Seaborne metallurgical coal supply from Australia has seen a sharp rise in recent years. Market leader BHP-Billiton alone saw a 28% year-on-year rise in production to 69 million mt in 2013.
However, long-term contract customers in Japan, Korea, India and Europe were not able to absorb the excess tonnages due to limited expansion in steel production. Miners were therefore left with China as the only possible destination for these cargoes, sources said.
This pattern is visible in official trade data as Chinese metallurgical coal imports rose by 40.7% from 53.6 million mt in 2012 to 75.4 million mt in 2013. The rise was significantly higher than the combined increase in coal imports by contract customers.
The surge in Chinese demand coincides with the shift toward spot pricing because that is the mechanism buyers are most comfortable with.
"China is the growing market and it doesn't take term pricing," an Australian producer said, a point reiterated by other participants.
Spot pricing in this case refers to the practice of the buyer and seller agreeing the price of a cargo at the time of the trade, even it is being sold under a long-term "framework agreement" as long as there are no volume restrictions or commitments on either side.
Taking this definition into account, four out of six Australian met coal majors already sell more than a quarter of their cargoes on a spot basis.
Leading the pack are Peabody Energy (33%), BHP-Billiton (30%), Glencore-Xstrata (29%) and Vale (29%). Anglo-American and Rio Tinto were less exposed to the spot market, at under 20%.
Platts calculations show that Anglo American sold up to 18% of its coal on a spot basis in 2013. This was corroborated by the company's presentation to investors last Friday that stated that both volumes sold on spot and monthly pricing basis amounted to 20% of their books in 2013, against just 9% in 2012. Rio Tinto sold only 9% of its coal priced on a spot basis, according to Platts calculations.
Meanwhile, Canada's Teck Resources, the world's second largest exporter of coking coal, sold more than 40% of its material on "short-term pricing" in 2013, compared with 30% in 2012 and 15-20% before that, Vice President of Coal Marketing Real Foley said during an earnings call last Thursday.
Market sources expect more movement toward spot pricing with China poised to import even more seaborne coal. Wider availability of low-sulfur and low-ash coals from Australia, Russia and Canada would complement Chinese steelmakers' increasing need for more environmentally friendly raw materials in the face of stricter regulations.
CFR CHINA DISPLACES FOB AUSTRALIA AS BENCHMARK
A direct consequence of China's growing dominance in the met coal market is that the FOB Australia price, which is used in most global term contract negotiations and some spot deals, is being challenged.
"The China price has and will be the most important price in the world," an Australian producer said last week.
China accounted for more than 80% of the total spot trades in the Asia-Pacific region in 2013. In the last few years, China has graduated from simply being the market of last resort to being a primary target for Australian producers.
An international trader recently described the quarterly benchmark price currently set in Japan as no more than "a lagging spot price with a premium." Another participant agreed, saying: "The [met coal] market is CFR China. There might be some security of supply premiums [in other countries] but the price is set in China."
The quarterly price is usually negotiated between Japanese steelmakers and Australian met coal producers. Japan has been the world's largest met coal importer for many years, but this position was usurped by China in 2013
