By Melissa Pistilli-Exclusive to Coal Investing News

Around 90 per cent of global coal production is associated with thermal coal primarily used for energy consumption.

Metallurgical coal or coking coal for steel manufacturing accounts for the remaining 10 percent of global coal production. Although the outlook for thermal coal is still positive, all signs point towards a more dismal outlook for metallurgical coal.

The metallurgical coal industry is set to face significant declines in price, according to analyst’s forecasts. Two of the world’s biggest mining companies, BHP Billiton and Rio Tinto, will likely need to reduce their coking coal contract prices by nearly 33 percent next year as demand from steel manufacturers drops. BHP’s share price slumped 3.5 percent to $29.91 earlier this week and Rio Tinto fell 4.9 per cent to $44.30.

As demand for steel exploded in developing nations like China earlier this year, the price of metallurgical coal tripled to over $300 per tonne, said Jim Thompson, Editor of Coal & Energy Price Report.  “Prices had gone to the moon, to record levels, before the financial meltdown,” he said.

Thompson points out that 2008 contract prices, which were set in 2007, ranged from $130 to $140 per tonne. However, next year’s prices have already been set at over $300. “Many U.S. steelmakers had just settled on ’09 prices, which were phenomenally high. I doubt those settlements will sit now and suspect they will renegotiate.”

Bloomberg conducted a survey of a nine-analyst panel whose median forecast placed the price of coking coal at $200 a tonne by April 2009. The individual forecasts ranged from $140 to $305 a tonne.

Thompson also expects 2009 contract prices to fall to around $200 a tonne, a price which he believes won’t lead to subsequent closures of coal mines. “But the steelmakers are playing a complicated game because in the longer term, met coal will still be a scarce commodity and they don’t want to risk production going offline then if there are drastic price cuts now.”

Any significant cutbacks in production will likely lead to tie-ups in price negotiations. “Neither producers nor consumers see it in their interest to settle annual prices in such a turbulent market,” said Citigroup Global Markets.

Dramatic cuts in steel demand affect coal pricing

The reductions in coking coal prices are directly related to the recent downturn in steel demand precipitated by the current global economic crisis.

“It’s become very apparent through cutbacks in North American, China, and European steel production anywhere from 10 to 20 percent that the demand side of the equation is continuing to slip,” said John Hughes, a Desjardins Securities analyst.

Jim Lennon, an analyst at Macquarie Group, reports that the “global synchronized nature of the slowdown” has devastated “the raw material suppliers to the steel industry.”

Citigroup warned that if the global crisis leads to further declines in steel demand, price settlements could be stalled and steel plant shutdowns could increase. Slumping steel demand has already stepped up the seasonal destocking cycle for metallurgical coal, it said. Citigroup expects steel production to drop 4.2 percent next year on weakening demand.

Metal Strategies managing director Christopher Plummer also paints a bleak picture. “In the second quarter of 2008, we were using 650 million tonnes of met coal on an annualized basis. By the second quarter of 2009, that number will drop to 560 million,” said Plummer. “That would be about a 15-percent decline in demand for met coal.”

Citigroup global commodities strategists Alan Heap and Alex Tonks said such cuts in steel production “will push coking coal into deep and persisting surplus.” Their prediction for 2009 coking coal prices is $150 per tonne.