BHP loses 10% on coking coal contract

Coking coal contract with Japanese steelmakers is worth less now than it was last year.

Ryan Newman (TMFNewmy)

Ryan Newman (CFA) is the Director of Research of The Motley Fool Australia, and Portfolio Manager for the Pro and North Star services. Ryan’s interest in investing and stocks began at a young. His journey with The Motley Fool started first as a member but when the company first came to Australia he joined the team as one of our writers. Recognising his investing talent and passion, it wasn’t long before he was approached to join the investing team as a research analyst on Pro. Ryan is passionate about learning and continual development. He earned his Chartered Financial Analyst (CFA) designation in 2022, and has completed his Bachelor of Accounting and his Graduate Certificate of Corporate Finance. Ryan loves spending time with his young family as well as non-fiction reading, catching the latest movies and following his sports team, the St Kilda Saints (AFL).

Published September 25, 2013 4:15 pm AEST

The BHP Billiton (ASX: BHP) Mitsubishi Alliance (BMA) has endured a 10% coking coal price cut with major buyer Nippon Steel, marking the first contract to be below the spot coking coal price in over two years.

On Thursday last week, both BMA and Anglo American reportedly agreed on US $152 per tonne as the contract price for the fourth quarter with Nippon Steel and Sumitomo Metal Corp. On Friday, the commodity was trading at US$152.50 – a substantial increase from the US$130 per tonne levels recorded in July.

However, although the contract price reflects a US $7 per tonne increase compared to the September quarter, it is also 10% lower than the US $170 agreed upon for the previous corresponding period (fourth quarter of 2012).

Coking coal has climbed in value in recent months despite strong supply having outstripped demand. Chris Drew from RBC Capital Markets said "China continues to import at elevated levels, but we do not expect this to aggressively drive up prices… Rather it should help absorb surplus supply. Australian exports have lifted through the year, and the US continues to export at elevated rates."

Foolish takeaway

Despite the volatility facing the sector, BHP has managed to climb 1.9% since the beginning of the month. Although it maintains a much higher degree of diversification than competitors such as Rio Tinto (ASX: RIO) or Fortescue Metals Group (ASX: FMG), it would still be wise to wait for a more attractive entry point or until volatility begins to subside.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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