These days, China has the final say in determining the price of iron ore and met coal prices. The latest news from China is that China may have decided to unlimitedly delay the talk on iron ore price with BHP Billiton (BHP) Rio Tinto (RTP) and Brazil Vale (VALE), citing that the iron ore price controlled by the big three needs to be changed. China wants to set a longer term price for iron ore, but the big three prefer a short term price agreement.
It is believed among the Chinese steel industry that China has paid $50B more than fair value on iron ore import in 2009. The country is now planning to invest more money to boost domestic iron ore production. If this is a strategy to win more time in negotiation with the big three, China has reportedly agreed on a long term pricing of met coal with several coal producers (price over $200/ton). This is seen as putting further pressure on BHP Billiton, Rio Tinto and VALE to give up short term price agreement. China has no other options but to import met coal because the high quality domestic production is simply not there.
The surprise new development in met coal price negotiation may boost long term outlook of the industry. Australian met coal producer Macarthur Coal is in a hot spot as the demand from China sky rocketed. American met coal producer Arch Coal (ACI) should also be among the top beneficiaries as its high quality met coal production is ramping up quickly, so better earnings ahead are not surprising. Massey (MEE)'s production will likely be impacted significantly due to its recent tragedy, causing more regulation on its mines. Alpha Natural Resource (ANR) will also likely be under stricter regulation because of the similarity of its mines. More costs are seen ahead for Massey and Alpha Natural.
Disclosure: Long BHP