Coking coal and Iron ore prices in 2011 - Ben Westmore

National Australia Bank commodities economist, Ben Westmore, takes us through the factors currently impacting on coking coal and iron ore prices.

GEOFF CANDY:  Welcome to Mineweb.com's Metals Weekly podcast.  Joining me on the line is Ben Westmore - he's a commodity economist at National Australia Bank.  Ben there has been quite a lot of action going on over the last couple of weeks, in both the coking coal particularly or the coal markets and the iron ore markets as well, not the least of which the unfolding tragedy in Australia around the flooding, particularly in Queensland.  If we look at the coking coal market first, there has been a lot of concern about what is going to be happening within the coal markets, given that a lot of production in Australia has been side-lined for a little bit of time - what's going on at this stage?

BEN WESTMORE:  Our estimates at the moment as to the likely fall in coal exports from Australia put at around 15 million tonnes with the majority of that though off in production and exports being in the coking coal market so that loss being about two million tonnes and when you look at that on a worldwide internationally traded seaborne basis it equates about 45 of seaborne metallurgical coal traded in any one year.  So it's a very material number in terms of the loss and it's coming at a time when we're also seeing some supply constraints in Russia with some frozen cargos and rail problems and at a time when you're seeing very strong cyclical demand from Asian steel mills who want this cocking coal as an input for production.

GEOFF CANDY:  Over the course of 2010 we saw prices of coking coal up from around about $180/tonne to $250 - there are some speculators saying we could see it as high as $500/tonne - more kind of reasonable estimates if you will, around $220/tonne - where are you envisioning the price going over the course of 2011?

BEN WESTMORE:  At the moment we know that the first quarter in terms of quarter renegotiated contract price has been set at around $225/tonne for coking coal - the second quarter in 2011 is the one where we are likely to see a bit of a spike as a result of the Queensland floods.  At the moment our forecasts are expecting prices to jump to around $300/tonne - so quite a big increase.  After that we do have some moderation in the price with those sort of levels factored in, but with continued outages in Australia and bottlenecks at ports and in terms of coal transport, we think that the supplier response is going to be a gradual rather than swift and so if you think about the profile of the likely path for coking coal prices they  are likely to decline very gradually over the subsequent 12 months.

GEOFF CANDY:  How is this likely to affect the market - do we get to a point where people are actually saying that prices are too high at this level - or is that a concern?

BEN WESTMORE:  We haven't seen it so far at this stage and when you look at those spot markets that are related to steel - so iron ore is probably the best spot market to get a good read and a good spot market in terms of liquidity to follow - it does appear that demand continues to be growing for these commodities.  But there's a point presumably where the cost curve for producers just rises too much and causes some demand destruction.  And while we're not saying it's a risk and it's a risk that could have significant implications for coking coal demand as well as for iron ore demand being the main two inputs into steel production.

GEOFF CANDY:  Talking about iron ore demand and clearly we've seen rising production from the likes of BHP Billiton.  We've seen spot prices on the iron ore market rising quite considerably as well.  What are the factors driving that?

BEN WESTMORE:  Yes - on the demand side it's a similar influence of the cyclical restocking that's going on and on the supply side I actually think that the Queensland floods and the increased concentration on the weather event that's going on at the moment is having some marginal impact on the iron ore price even though iron ore production is generally not in the west of Australia rather than eastern seaboard where the floods are.  So we do know that this sort of weather event increases the likelihood of cyclone activity and looking at it from an Australia-centric perspective, there has been expectations of more cyclones that could cause outages in the Pillborough and those sort of areas where BHP Billiton and Rio Tinto and the big Australian iron ore miners produce, so since the end of November iron ore prices have risen by around 10% and at this stage notwithstanding the possibility of some demand destruction due to what's happing with coking coal prices, we wouldn't expect the prices to abate from these levels any time soon.

GEOFF CANDY:  And in terms of the price negotiation structure - the way in which iron ore prices are negotiated - have we seen all the effects of those changes filtering through now or are we likely to still see disruptions further ahead.

BEN WESTMORE:  For the time being I think we've seen most of them filter through and the majority of iron ore contracts any way do follow the spot prices in iron ore with some lag quite closely - going forward one to watch in the iron ore market is a continued evolution of this pricing system to become even more closely integrated with the spot price - that could come further down the track in the move from quality contract prices to a smaller time horizon of contract prices and that is something that, definitely from the miners perspective anyway, that they are quite keen to pursue.

GEOFF CANDY:  Just to close off, where do you see iron ore prices going over the course of 2011 and indeed coal prices as well?

BEN WESTMORE:  For both coal and iron ore, we have a broadly similar profile because the demand outlook is similar for both commodities - especially for coking coal.  With iron ore we do see some supplier response - as you alluded to BHP Billiton and some of the other big miners are reporting increased production, and in the second half of 2011 as a result, we'll probably see some moderation in iron ore prices, but the demand influence is in place - we'll continue to see prices stay at high levels.  In terms of coking coal prices, as I said, we see a peak at around $300/tonne in the second quarter and then a very gradual moderation over the subsequent 12 months.  In terms of thermal coal prices - we at the moment have a jump in thermal coal prices - annual contract price from $95/tonne to around $130/tonne in the 2011 ... fiscal year.  That's our broad views on where the bulks are going and we do think that in general prices will continue to maintain these high levels but there will be some moderation over the next 12 - 18 months.