According to The Nikkei Asian Review, Nippon Steel & Sumitomo Metal plans to end its usual practice of negotiating coking coal prices with mining companies and instead adopt an international benchmark. The Japanese steelmaker expects the change to give it more flexibility in adjusting prices.
The company wants to switch to market prices starting with contracts for the April-June period this year.
Prices of iron ore, a raw material for steel, have been linked to market rates since 2010.
Currently, coking coal prices are negotiated every three months. Nippon Steel is in talks with Anglo American and other mining companies over linking prices to the international spot price average. It may, however, retain the current negotiation-based system with some of its major suppliers.
Spot prices for coking coal have fluctuated wildly since 2016, and talks between Nippon Steel and suppliers have stalled. A cyclone that hit Australia in late March has increased the volatility of the benchmark spot rate that Nippon Steel and its suppliers refer to in price negotiations. As a result, the two sides have yet to agree on prices for the April-June period this year. Prices for the period are usually set by the end of March.
China, which accounts for half the world's crude steel production, is partially driving that volatility. The country's steel mills generally import iron ore at the spot rate. By contrast, Japanese steelmakers have tended prefer long-term contracts to lock in prices and ensure steady procurement. But they are finding it increasingly difficult to get the prices they desire.
Because it has not been able to fix the cost of raw materials, Nippon Steel has yet to publish its outlook for fiscal 2017, which ends in March next year. Adopting an international standard would allow the company to adjust its steel prices in response to sudden fluctuations in coking coal rates.
Nippon Steel's plan could impact steel sales. The company is considering reviewing wholesale prices every month rather than fixing them on long-term contracts, as it currently does. This would enable the company to pass on increased costs more flexibly to buyers, thereby smoothing out annual revenue and profit -- which are susceptible to volatility -- over the years. Price negotiations between steelmakers and major buyers, such as automakers and electronics companies, may shift to shorter-term contracts from the current six-month contracts.
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