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Seaport analyst wonders if quarterly met coal benchmark falling out of fashion

An analyst with Seaport Global Securities LLC suggests the closely watched quarterly benchmark for metallurgical coal pricing might be a tool of the past.

Mark Levin wrote in a May 29 note that the largest player in the seaborne metallurgical coal space, BHP Billiton, has been pushing customers away from quarterly met coal pricing for the past few years. Other industry observers have in recent weeks noted the practicality of the met coal benchmark could be waning.

"Should the quarterly pricing system go away, we think it would be a good thing. If the last five years have proven anything, it's that the met price is simply too volatile to lock in a price for three months," the note states. "Sometimes the producer wins in this arrangement, sometimes the customer wins, but the reality is indexation is far more transparent and real-time despite index imperfections and what, at times, can be limited transaction activity."

Levin said that while several of the largest Japanese steelmakers have resisted indexation, that could soon change. He noted that met coal is one the last of the major ferrous raw materials that still uses a quarterly price benchmark.

After bouncing back from several straight quarters of decline, prices for metallurgical coal spiked again as Cyclone Debbie disrupted supply in Australia. The pricing volatility has affected quarterly pricing negotiations, and a second-quarter met coal benchmark settlement has not been revealed.

"Many large producers, including Teck Resources Ltd., suggested the $150's [per tonne] was where the met price appeared to be stabilizing before Cyclone Debbie," the note states. "Will that prove to be a floor this time around? Color us skeptical. In the near-term, there still seems to be too much supply chasing too little demand."