Indian steelmakers are increasingly sourcing their coking coal requirements from spot market as spot prices have substantially fallen below long-term prices in the last two quarters.
From being completely dependent on long-term contracts, steelmakers are now sourcing only 60% of their coking coal requirements through that route, an official from a leading unlisted steel company said.
If the price differential between spot and long continues, they may even bring down long purchases to 30-40%, according to industry experts.
Coking coal, considered relatively stable commodity price-wise, has been seeing some severe price fluctuation in global market due to increased supply and fall in demand from China.
For the April-June, most Indian steelmakers are likely to sign coking coal contracts at a six-year low of $120 per tonne. But spot market price has come down even further to $107-108.
"Since October, long-term agreements (LTA) for coking coal are being signed at a premium of $5-$7 to the spot prices. Prices in spot market have fallen rapidly. Increased availability of coal mainly due to less absorption from China and US have brought down spot prices," Prakash Duvvuri, head of research at OreTeam, a Delhi-based iron ore research firm, said.
At present, China is facing an overcapacity of steel, due to which the production of the alloy has slowed.
Following the slump, China is expected to import only 620-625 million tonne (mt) as against an earlier expectation of 630 mt. Even the US is now moving more towards Direct Reduction Iron (DRI) steel making using shale gas rather than buying coking coal.
Giriraj Daga, senior analyst with Nirmal Bang Securities, said LTAs for coking coal were signed at $143 in January-March when spot price averaged at $135.
"It seems that availability of coking coal from smaller players especially from South Africa has increased which has lead to this sharp fall in spot prices," he said.
Earlier LTAs for coking coal were used to be signed for a year, but this duration has now shrunk to a quarter and it may even come down to a month if price differential between long and spot prices continues, Duvvuri said.
Uncertainty of steel demand and volatile prices are key reason for shorter LTAs.
Another reason is that spot purchase allows more flexibility to steel companies for sourcing the key raw material.
"Many steelmakers in India have cut their production capacities, and need to reduce their coal consumption. LTAs do not offer flexibility of cutting down purchase abruptly, which has also led to preference towards spot market," he said.
Among leading steelmakers Tata Steel imports 50% of its coking coal requirement while Steel Authority of India 70%. BHP Billiton of Australia is the biggest coking coal supplier for Indian steelmakers. R K Goyal, managing director at Kalyani Steel, said that steelmakers traditionally prefer LTAs over spot purchase to ensure timely availability of the raw material and to avoid uncertainty.
Daga said players having huge requirements would still prefer to buy coal through LTA than spot.
Industry experts do not expect the price differential in long and spot markets to continue for long.
"I don't expect this trend to continue for long as the equilibrium between long and spot price would be re-established. I expect prices to stabilise at $130-140, going ahead," Daga said.
Duvvuri expects this trend to continue for 2-3 quarters or even till March.
"There is no deficit of coking coal in seaborne trade unlike iron ore. So there is less likelihood of fluctuation prices going ahead. In 2014, prices may average around $135 but are likely to again increase to $140 in 2015 following increase in demand from India and some improvement in China," he said.
The official from the unlisted steel company said India's steel production in the current fiscal is likely to improve by 10 mt, which means 12-14 mt of additional coking coal requirement.
Coking coal imports in 2013-14 were $32-33 million tonne while this fiscal they are expected to go up to 35-36 million tonne.