BHP loses 10% on coking coal contract

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

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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