Serious Inflation in the Works

This is a sign that serious inflation is going through the world economy. 200% - carumba!

Record coal contract has producers salivating

South Korean steel maker agrees to pay three times as much as it did last year, setting 'astronomical' new benchmark

ANDY HOFFMAN

MINING REPORTER

April 8, 2008

Coal producers are rejoicing after a South Korean steel maker agreed to an unprecedented 200-per-cent increase in the price it will pay for coking coal, setting a benchmark for other yearly contract negotiations between miners and steel makers.

However, the record contract will likely add to inflationary pressures, as the price increase is expected to boost the cost of producing everything from automobiles to building materials.

Posco, Asia's third-largest steel maker, said it will pay Australian coal producers more than triple what it did last year or as much as $305 (U.S.) a tonne for coking coal, a key component in making steel.

"What appears to be coming to fruition in coal contracts are numbers that we've never seen. These are astronomical numbers in [metallurgical] coal," John Hughes, an analyst at Desjardins Securities, said in an interview.

Coal producers annually negotiate contract prices with steel makers for the coal year, which begins April 1. The Posco contract marks the first major met coal contract signed for the 2008 coal year and is likely to set a precedent for other negotiations.

The seaborne met coal market, which annually supplies roughly 180 million tonnes of coal to steel makers, has been sideswiped by an extraordinary string of disruptions over the last few months that has constricted the coal supply amid strong demand for steel.

Extraordinary rains caused flooding at coal mining operations in Australia and is believed to have reduced production by as much as 15 million tonnes.

In China, where a booming economy has driven higher demand for steel, the worst snowstorms in 50 years hindered production. Attempts by coal producers to increase supply in response to the anticipated higher prices have been constrained by logistics including a lack of rail and port capacity.

"You could say that $305 a tonne for met coal is almost panic-buying levels. Which means somebody is desperate enough to want to keep their blast furnaces running and will pay that price for the coal," said Tony Robson an analyst at BMO Nesbitt Burns.

Shares of Canadian coking coal producers, including Fording Canadian Coal Trust, Teck Cominco Ltd., and Western Canadian Coal Corp. gained in anticipation that they will win similar increases.

Fording units surged to a record, rising as much as 11 per cent before settling back for a 6-per-cent rise.

Company spokesman Colin Petryk said Fording will negotiate "accordingly" in its talks with steel makers, which are continuing.

"It's definitely showing us where the price is going. That's good news for Fording," he said.

The Calgary company, which supplies coal to Posco, among others, and hopes to produce roughly 23 million tonnes of coal this year, has seen its unit price increase more 60 per cent so far this year, pushing its market value above $9-billion (Canadian).

Fording, which owns 60 per cent of the Elk Valley Coal Partnership, put itself up for sale in December. Teck, which already owns about 20 per cent of Fording and has a 40-per-cent stake in the Elk Valley operations, giving it a 52-per-cent interest in the overall partnership, has been widely seen as the most logical buyer.

However, Fording's price tag has risen so much that Teck may not be willing to bid.

"I think the message from Teck Cominco has been that they don't want to overpay for Fording. And the higher that the unit [price] goes, the more difficult it is, if you want to buy Fording, to substantiate you are not overpaying," Mr. Hughes said.

Yet the Posco contract likely means steel customers and consumers will have little choice but to pay more.

Global steel prices hit a record last month. Posco recently said it was planning another steel price increase after raising prices by 11 per cent in February.