© Copyright The Steel Index 2015 /1

TSI Market Watch: Coking Coal June 10, 2015

Quarterly negotiated benchmark price defies long running demise predictions… for now

Executive Summary

Parties are limbering up for their ritual quarterly self-flagellation exercise.

Meanwhile a resumption of Chinese demand has stemmed, then reversed, falls in CFR China and FOB Australia prices. China has been notably absent from the seaborne market recently, being only Australia’s 3rd largest customer in December, January, February, March and April – behind India and Japan.

In the background, continual price falls have begun to cause serious discomfort to miners, after multiple rounds of cost-cutting exercises have left less room for further efficiencies and the policy of amortising costs over as many tons as possible has exacerbated oversupply: particularly in the relative absence of the China market.

This has manifested itself in successive announcements by Glencore, Teck and Peabody of intentions to idle mines in order to trim overall supply to the market.

Wide acceptance heard that the last set quarterly price was ‘damaging’ to that pricing system, given subsequent spot price divergence of over US$24/tonne. Yet, at the time of setting, there were some recriminations in the market with a perception that it was at an overly low level!

Overall volumes across CME Group and Singapore Exchange (SGX) have risen by +26.3% in January-May in 2015, compared with 2014.

After the double-whammy of falling prices and rising currency strength in May, the greenback is pulling away from the AUD again, to the relief of producers.

Cuts on the horizon

Peabody is the latest metallurgical coal producer to announce a production

curtailment, indicating it will be lopping off almost 40% (1.5 million tonnes) of its

annual North Goonyella production tonnage. That follows Teck’s announcement

of a similar figure from planned temporary idling of six mines only last week. In

turn, that comes on the heels of Xstrata’s planned reductions. One market

participant scathingly remarked “This sums to nothing” about the effect of the

cuts. Whilst some cuts are announced, other capacity is coming online.

With Vale’s Moatize moving on up to 22 million tonne per year output and the

rail and port almost ready, the last week’s announcements of 1.5mtpy cuts in Oz

and Canada may not quite cut it.

© Copyright The Steel Index 2015 /2

It does, however, point to the distress being felt by producers in the sector as production economics bite.

The primary question for the market is how the US and domestic Chinese miners are faring in this low-

price environment. Certainly China’s thermal sector is feeling pain all round.

These cuts could have a bolstering effect on producers negotiating positions for quarterly discussions,

particularly as these announcements come on the back of a turnaround in spot prices. A high settlement

and subsequent fallback in spot prices, however, could spell the death of the benchmark – as the last

round caused significant distress for buyers seeing spot prices diverge from the benchmark by more than

–US$24/tonne.

Long fall for spot & quarterly prices

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

80

90

100

110

120

130

140

150

160

170

180

Jan

13

Feb

13

Mar

13

Ap

r 13

May

13

Jun

13

Jul-

13

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

De

c-1

3

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-1

4

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

e-1

5 T

o D

ate

Quarterly PHCC FOB Index vs Quarterly (RHS) TSI PHCC FOB Monthly Average

From buyers, the Quarterly system has been a negative proposition for

much of the past 30 months, compared with index options.

US$/t US$/t

© Copyright The Steel Index 2015 /3

Goldman Sachs recently cited the leading Indian steelmaker as having signed its first index-linked

contract as another symbolic blow to the increasingly creaky-looking negotiated quarterly benchmark

system. Other miners, while far from enthusiastic, are reported to be preparing for an indexed world.

When the upside comes, miners will be able to see upside, without customer rancor. Perhaps more

importantly, it will help to align global BOF steelmaker input costs: crucial in a time of continual

competition with imports. The market has been on a continual downward run for a number of years,

putting the steel industry back into a cycle of searching for maximum efficiency.

Ultimately, unless the production cut moves are followed by other producers, it is a classic case of

‘prisoner’s dilemma’ for miners that do choose to cut output. Coking coal has the distinction of far

greater industry concentration, however, when compared with the eternally fragmented steel market.

The CME and SGX FOB Australia forward curves have converged to around 25 cents of each other out

through Cal’ 2016. Furthermore, as the basis of many index-linked FOB contracts in the physical market

have recently migrated to TSI, companies wishing to hedge on SGX are now provided with the

opportunity to do so without incurring basis risk.

After-party slow grind (down)

Ignoring the huge 07-08 run up in prices, prices have been being ground

downwards for a number of years, particularly since 2012. TSI’s ASEAN price

leads all markets lower (it is a 99% correlated FOB China proxy).

Global steelmakers seeking every efficiency in the face of shrinking margins.

60

70

80

90

100

110

120

130

140

May

/20

06

Oct

/20

06

Mar

/20

07

Au

g/2

00

7

Jan

/20

08

Jun

/20

08

No

v/2

00

8

Ap

r/2

00

9

Sep

/20

09

Feb

/20

10

Jul/

20

10

De

c/2

01

0

May

/20

11

Oct

/20

11

Mar

/20

12

Au

g/2

01

2

Jan

/20

13

Jun

/20

13

No

v/2

013

Ap

r/2

01

4

Sep

/20

14

Feb

/20

15

Indexed Global HRC Price Average

(Equally weighted index of ASEAN, N. European, USA and Turkish HRC prices.)

© Copyright The Steel Index 2015 /4

Whilst the forward curve is giving nothing away, the current market does appear a little ‘inscrutable’.

The key question is whether the returned Chinese demand seen in May will prove resilient. If China’s

import tonnages resume a more gentle easing than the brutal drop seen in April, the market may be on a

slightly firmer footing moving forward.

A pancake-like forward ‘curve’

CME & SGX FOB Australia forward curves are striking in their flatness. They are

currently within 25-50 cents of each other through till the end of 2016.

No recovery is being priced in from todays levels, with the consensus appearing

to be a long continuation of the status quo in today’s market.

80828486889092949698

100

CME FOB Forward Curve SGX FOB Forward Curve

US$

/t

The spot market was largely flat over the course of May, with an uptick seen at

the end of the month. The beginning of a rise/bottom of the market?

Before everyone pulls bunting out: January looked very similar, too…

US$

/t

85

90

95

100

105

110

115

02/01/2015 02/02/2015 02/03/2015 02/04/2015 02/05/2015

PHCC FOB Aus PHCC Monthly Average 30 day MA

Past no guide to future performance

© Copyright The Steel Index 2015 /5

Recent history has not painted a pretty picture in terms of Chinese import demand. However, seaborne

prices are no longer at the level of March (when CFR China prices for the month averaged US$108.50/t).

Australian material has proven highly competitive at current levels against the domestic Chinese miners

output – which is what stoked the resumption of buying over the course of May. So, what is the appetite

among miners to supply at current levels?

For further information

Please contact: Tim Hard (Singapore) +65 6530 6413 hard@thesteelindex.com

Jing Zhi Ng (Singapore) +65 6216 1056 jz.ng@thesteelindex.com

Note to Editors:

The Steel Index (TSI) is a leading specialist source of impartial steel, scrap, iron ore and coking coal price information based

on spot market transactions.

Transaction price data is submitted confidentially to TSI on-line by companies buying and selling a range of relevant steel,

iron ore, scrap, coking coal products. TSI’s index reference prices are then calculated using transparent and verifiable

procedures which are fully aligned with IOSCO principles.

TSI’s iron ore price indices are published daily at 19:00 Singapore/Shanghai time (11:00 GMT) and coking coal price indices

daily at 18:30 Singapore/Shanghai time (10:30 GMT). Steel prices for Northern Europe, Southern Europe and US HRC are

published daily at 14:00 UK time and for ASEAN HRC imports daily at 18:30 Singapore time. Scrap prices for Turkish imports

are published daily at 13:30 UK time. Weekly steel and scrap price indices are published every Monday and Friday

respectively, with each price representing the average transaction price for the previous calendar week.

© Copyright The Steel Index 2015 /6

TSI’s indices are widely used by steel mills, miners, traders, distributors and manufacturing companies worldwide as the

basis for their physical pricing arrangements. TSI’s indices are also used as the industry standard in the settlement of ferrous

financial contracts.

Singapore Exchange (SGX), LCH.Clearnet (London), CME Group (Chicago), NASDAQ OMX Clearing (Oslo) and

Intercontinental Exchange (ICE) all use TSI’s iron ore index for settling their monthly cleared iron ore financial contracts. SGX

also uses TSI’s coking coal indices and hot rolled coil index for ASEAN imports to settle its coking coal and Asian HRC steel

futures and swap contracts respectively. In addition, TSI’s prices are used for the settlement of European hot rolled coil steel

contracts on LCH.Clearnet and CME Clearing Europe and for the settlement of Turkish scrap imports contracts on

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