Coal Prices Falling; Will Iron Ore Follow? (BHP, KOL)

The FT reports that contracts between some large coal producers and steel and power companies show coal prices falling by as much as 60% Australia’s BHP Billiton Ltd. (NYSE:BHP) and Japan’s Mitsubishi Corporation have reportedly agreed to a coking coal price of $128-$129/metric ton with Nippon Steel. That is down almost 60% from last year’s price.

Because this deal is the first of the 2009-2010 year, it is likely to set a benchmark price for steelmaking coal prices. Last year’s price settled at $300/metric ton for coking coal. This year, however, falling demand for steel is causing coal and iron ore prices to drop like a stone.

Prices for thermal coal, which is used to generate electricity, are also falling. Swiss miner Xstrata has agreed to a price of $70/metric ton for the coming year with a Japanese utility. That is down from $125/metric ton last year. Korean utility companies are pressing for $60/metric ton.

Lower coal prices could mean that iron ore prices too will fall significantly. BHP Billiton, a large producer of iron ore, that may be double trouble.

The down market for steel is driven by the lack of demand for construction and automobiles. Less steel means lower prices for coal and iron ore. This could lead to lower prices for cars and other products that use a lot of steel. Of course, the lower prices also lead to lower employment, so there are fewer buyers available to take advantage of the lower prices. And so it goes.
The Market Vectors Coal ETF (NYSE: KOL) that follows the miners hasn’t gotten word about this yet.  Shares of that ETF are up almost 20% in the last 5 days.

Paul Ausick
March 24, 2009