Indeed, according to Metal Expert, some of the coal volumes prior to 4Q12 were contracted for just October-November rather than for the full quarter. We believe this approach was lobbied for by the steel makers in order to create the possibility to revise prices again in December to adjust for potential steel prices moves (i.e. to protect its margins). We believe this indicates that pricing power is currently in the hands of steel makers. In particular, we think this stems from record-high coking coal production domestically (up 30% YoY in the past three months), which is not being met by steel product growth (up 8% YoY) or export abilities, as the largest importer of Russian coal, Ukraine, has been cutting imports due to its oversupplied market. We believe abnormally high coal production in Russia stems from miners' attempts to spread costs across volumes, i.e. to lower the cost on a per tonne basis. That in turn allows competition on a price basis and helps to protect market share.
Currently, contract prices are being discussed for the December-January period. However, we do not anticipate any further strong coal price discounts for this period since the domestic finished steel market has stabilised, while a minor pick-up in the coking coal global benchmark (to USD 163/t) has been observed lately. Thus, prices are likely to stay near USD 100/t (GZh) in the coming month. Nevertheless, pricing power remains in hands of steel makers, which points to a rapid downward price revision if steel prices weaken, in our view.