By Melissa Pistilli-Exclusive to Coal Investing News ^[1]

Rio Tinto Group ^[2] recently gave a big break to JSW Steel Ltd ^[3]. on an existing contract.

The mining major's move to cut its coking coal prices for the Indian company by 43 per cent are a dark sign of things to come for coking coal miners. "It's an indication the market is going off rather quickly and rather savagely — to agree to reduce a previously agreed price, there's really no other conclusion," one analyst commented ^[4].

JSW will now pay US$175/tonne for coking coal from Rio for the remainder of the year, a big drop from the US$305/tonne the major was able to extract while commodities were booming. 

Price talks for upcoming annual contracts between coal producers and steel manufacturers are just beginning and this latest news is sure to have an impact on the outcome. "It paves the way for lower prices for this year's contracts," said Francisco Schumacher ^[5], an analyst at Raymond James.

No doubt, steel manufacturers will now have precedent to push Rio Tinto, its competitor BHP Billiton Ltd ^[6]. and other coal miners for much lower contract prices. Both Rio subsidiary Coal & Allied ^[7] and Felix Resources ^[8] have reported they are expecting significant cuts in upcoming contract prices that analysts predict will return to near 2007 levels.

"Normally we would not say that if there was going to be a few dollars in it, but obviously it's going to be substantially reduced," said Brian Flannery ^[9], Felix Managing Director. Steve Hulton ^[4], senior analyst at Wood McKenzie, attributes the heavy price reductions to weakening coal demand and a lack of investor confidence in the commodities market.

Major players like BHP, which dominates the coking coal export market, Rio and Xstrata Plc ^[10] have already begun to slash production as steel mills around Asia reduce their orders to just the level necessary for maintaining blast furnaces. A Coal & Allied spokesman said the company will most likely cut back on its coking coal sales this year as well.

Most industry analysts are predicting a more than 50 percent drop in coking coal price for 2009. Goldman Sachs JBWere ^[11] has said that weak global steel demand is threatening the contract price of all types of metallurgical coal. "The current oversupply could take several months to work through and we envisage a very tough market in which to be negotiating supply contracts."

Thermal coal prices

Thermal coal, used to fuel power stations, is also expected to feel the effects of a shrinking global economy.  The most recent contract agreements point towards a 30 per cent drop in thermal coal prices. "We will see more subdued markets in 2009, with thermal coal prices likely to soften compared with 2008," said Coal & Allied Managing Director Bill Champion ^[9]. "As well, the premium for semi-soft coking coal over thermal prices also is likely to narrow."

As coking coal prices tripled last year on strong demand from growing economies, many coal miners began producing more coking coal in lieu of thermal; however, while coking coal prices have taken a dive thermal coal demand has maintained a stronger position relative to other commodities.

Rio to let go of Coal & Allied

There are reports that Rio Tinto is looking to sell ^[11] its stake in its subsidiary Coal & Allied. The company is laden with debt and trying to save money by reducing its capital expenditure, cutting its workforce and selling off some of its assets.

Apparently, there are a few buyers interested (including Brazilian mining giant Vale ^[12]) in taking the 76 per cent stake worth US$3.8 billion off Rio's hands. Coal & Allied owns three operations in the Hunter Valley of New South Wales and produces semi-soft coking coal, thermal coal and PCI coal.