Coking coal 20% price rise.

Coking coal and iron ore prices have increased in 2001, according to Commerzbank.

Coking coal is mainly sold under yearly contracts. In 2000 the market tightened markedly reflecting both strong demand from the steel industry and the lagged impact of shuttered capacity in North America. The

tightening marketplace paved the way for coal producers to push through sizeable price hikes on the 2001 contracts. The benchmark Australian Goonyella hard coking coal brand was increased by 7.5% from $39.75/t to $42.95/t fob while US prices rose by an even greater 20% or so to $58.5-$60.0/t. Furthermore, some semi-hard coking coals were reclassified as hard resulting in a substantial price hike.

The 2001 contract hike only partially reversed the hefty $13.25/t drop in Goonyella prices between 1997 and 2000. Australian mine and logistics costs, however have tended to decline in recent years aided in part by a weak local currency. With cash costs typically in the $20 to $25/t zone, a coking coal price of $42.95/t is now highly attractive from a profitability perspective for most Australian mines. For 2002 Commerzbank are looking for unchanged coking coal contract prices. Limiting the bargaining power of the mines will be the backwash of a tough year financially for the steel industry and a probable fall in demand reflecting lower pig iron production in North America, Western Europe, Japan and possibly the Asian Rim. In common with iron ore, coking coal contract price developments in one year tend to reflect steel industry economics in the previous one.

The iron ore market also tightened considerably in 2000 reflecting the 11% surge in exports to a record 488Mt. With little inventory in the system at year-end the iron ore mines were theoretically in a strong position to push through price hikes on the 2001 contracts. The situation was however complicated by the rapid deterioration in steel industry economics in the final quarter of 2000 and the consequent strong case made by the steel mills for price concessions. The final agreement in most cases was a 4.3% hike in fines and unchanged premiums in absolute terms for lump. In the case of Rio Tinto's Hamersley unit lump was increased by 3.23%. Despite the 2001 pricing action, the benchmark CVRD Itabira fines price of 28.86 c/Fe-unit is still marginally below the 1998 contract level of 29.69 c/Fe-unit and also well under the 1991 peak of 33.25 c/Fe-unit.

World steel production in the five months to May 2001 was only down a marginal 0.2% on the record levels of 2000. An acceleration of the downward

trend is expected in the coming months but abstracting from macro-economic disasters the decline for the full year does not look like being much greater than 2% or 3%. World iron-ore demand and exports are therefore likely to remain at a high level and perhaps down only 2% or so on 2000.

The problem for the iron ore mines is that the market could be looking weak towards year-end just as the contract negotiations commence.

This combined with a tough year financially for the steel industry, especially in the key importing regions of Western Europe and Japan, suggests that the best the mines can expect on the 2002 contracts is unchanged prices. In fact, a decline of perhaps 2% would not be totally surprising.