TOKYO -- Japanese steel producers are nervous about the prospect of BHP Billiton expanding its already large market share in coking coal, a key ingredient in steelmaking, because the Anglo-Australian company advocates market-based pricing over the fixed long-term contracts they prefer.
An asset realignment by Anglo American has grabbed the attention of Japan's blast furnace steelmakers.
The London-based resource giant has taken a hit from low commodities prices and is trying to slash assets in coal and other noncore operations to focus on platinum and diamonds. Resource producers suffering from earnings slumps must prioritize cash flow management as lenders push them to cut debt levels.
Anglo likely will unload Australian mines that produce high-quality coking coal, a variety coveted by Japanese steelmakers. The company is expected to decide who it will sell the assets to soon. BHP, flush with capital, seems to have an edge over other potential buyers.
The Japanese steelmakers are uneasy because if BHP acquires Anglo's assets, BHP's market share in exported coking coal would exceed 30%. BHP's share was 24% and Anglo's 7% as of 2014.
For the high-quality varieties that the blast furnace steelmakers use, BHP's share may even be well north of 50%, according to an official at a major Japanese trading company.
"If BHP does buy [the assets,] that could hamper free competition and run afoul of Australia's antitrust regulations," said a Nippon Steel & Sumitomo Metal official. "So we will consider taking legal action to block the move."
Flash from the past
Japanese steel companies may be remembering a bitter experience from late in the last decade. Up to that point, Nippon Steel negotiated annual purchase prices of high-quality coking coal with supplier BHP Billiton Mitsubishi Alliance (BMA) -- a 50-50 joint venture of BHP and Mitsubishi Corp.
Pricing agreed to by the two titans served as a benchmark for other steel companies. But things changed around 2008-09, when resource prices were rising sharply. BMA and other suppliers pushed for quarterly pricing to reflect higher prices on the spot market.
Producers' influence was growing, so Nippon Steel had no choice but to accept the terms. BMA further demanded that Nippon Steel review coal prices monthly and refused to sell coal at quarterly fixed prices.
The relationship broke off, and Nippon Steel strengthened ties with other suppliers like Anglo instead. But now that BHP may obtain coal assets from Anglo, the Japanese steelmakers may be forced to re-examine their procurement strategies.
To make highly transparent spot market prices the benchmark for contract pricing, BHP is selling almost all of its coking coal at market-linked prices.
The fallout is already visible. Coking coal spot prices have doubled from the start of this year to $160 this month -- a surge that cannot be explained by the supply-demand balance.
"We do not welcome price volatility stemming from an oligopoly," says Shunichiro Mori, a director at Nippon Coke & Engineering.
Anglo's asset sales could sharply marketize coking coal, says Robin Griffin of U.K. research company Wood Mackenzie.
Some observers are concerned that the Japanese steelmakers might have to give up quarterly fixed-price procurement altogether. If BHP gains greater influence and becomes the single dominant player in the market, the steelmakers could have a tough time finding suppliers willing to negotiate long-term arrangements.
A Nippon Steel official said the company may consider taking stakes in coal projects, but good mines are pricey and generally not discounted, so such purchases would require massive outlays.