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The spot market was the place to be for coal miners in 2016, but with prices for the bulk commodity sliding rapidly, 2017 looks set to favour those selling on traditional quarterly contracts.
The divergence between spot and contract prices for coking coal was bigger than ever in 2016 and looks set to continue in 2017, renewing calls for the industry to make a full-scale switch to a daily market or "spot" price.
Those selling Australian coal at prices agreed in quarterly contracts, like Glencore and Anglo American, were left behind when coking coal prices skyrocketed last year, with the spot price more than $US120 higher than the contract price at one stage in September.
Roles reversed
But the roles have quickly reversed on a 35 per cent slide in coking coal spot prices over the past 40 days; those selling at contract prices will receive $US285 for each tonne until March 31, and are already enjoying a 30 per cent premium over coal sold on the spot market, which is fetching about $US201 per tonne.
The rapid slide in the spot price has followed China's decision to overturn many of the supply interruptions that caused the coal price to rally in 2016 .
Most of the supply interruptions that hit Australian mines in mid-2016 have also been resolved.
Shaw and Partners analyst Peter O'Connor said the quarterly contract price usually performed better when spot coal prices were sliding.
"The rule of thumb is you want to be selling spot in a rising market and then contract in a falling market," he said on Monday.
If, as expected, contract prices are stronger than spot prices during 2017, it will be the fourth year in five that contract prices have averaged higher than the spot price.
Discrepancies
Mr O'Connor said the recent large discrepancies between the spot and contract price could convince Japanese steel makers to do away with the traditional contract system.
"It's not as big a thing as it used to be," he said. "If anything, this may prompt the Japanese to say 'why are we doing this, we just got done over, why don't we just go spot'. They've done it for iron ore and a bunch of other things and (coking) coal is becoming almost liquid enough.
"It is probably trending that way."
The Steel Index speculated in October 2016 that "terminal strains" would be placed on the quarterly contract system if spot prices were suddenly to slump below the high contract prices struck for the December quarter and the first three months of 2017.
A recent survey of market participants by the Singapore Exchange suggested that only 45.3 per cent of respondents believed the quarterly contract system would continue beyond 2017, with 23.4 per cent believing it would not survive more than a year while 33.1 per cent said they were uncertain.
Diverse demand
"With demand more diverse and less predictable, the increasingly widespread transition toward market-based pricing couldn't be more timely," the SGX said in its report, Road to Recovery Or False Dawn.
But others, like Pembroke Resources boss Barry Tudor, prefer the contract system because it helps build long-term relationships with customers.
"You build trust and a business relationship over a long period of time," he told The Australian Financial Review in October.
While Anglo, Glencore and Peabody are the best known users of the quarterly contract system, Mr O'Connor said many of those miners sold into spot and contract markets, while BHP tends to sell as much of its product into spot markets as possible.
With the cyclone season in force in Queensland until April, the spot price could yet rebound, but aside from such interruptions, most pundits are tipping the price will continue sliding through 2017.
Fall tipped
Credit Suisse has forecast coking coal will average $US194 a tonne in fiscal 2017, then fall to $US145 in 2018 and $US125 in 2019.
Mr O'Connor believes spot prices for coking coal will be around $US120 or $US100 a tonne by the December quarter of 2017.
The steep falls in the spot price will eventually drag contract prices lower, with Mr O'Connor suggesting the contract price for the three months to June 30, 2017, will be significantly lower than the present quarterly price of $US285 a tonne.
"It will be a sub-$US200 per tonne number for sure, and at the rate it is going it could be a lot less," he said.
Coking coal is not the only bulk commodity to have shown signs of weakness over the past month; thermal coal prices have fallen 27 per cent since mid-December, manganese is down 15 per cent over the period and iron ore is down 8.8 per cent.
Uranium improves
Oil prices have shown improvement in recent weeks, but the big improver over the past month has been the worst-performed commodity of 2016, uranium.
Prices for the nuclear fuel are still very low, but have risen 21 per cent since mid-December, prompting a bounce in share prices for uranium producers like Cameco, Paladin Energy, Energy Resources of Australia and several other small companies like Peninsula Energy and Toro Energy.
"Uranium and uranium equities are on a tear and I don't think we have seen the end of it," Mr O'Connor said.