Prices for benchmark Japanese imports of coal for its steel and metals-making furnaces may drop by around 25 percent as the fuel nears the cheapest it has been for three years, say sources close to the final round of this year's quarterly price talks.

Japanese steelmills and Australian producers are likely to settle for $160-$170 a tonne FOB Australia for the fourth quarter, a sharp drop from the previous quarter but still a premium of $10-20 above spot prices, producers and traders said.

The Japanese-Australian quarterly price is still the most important benchmark against which other types and origins of metallurgical coal is sold and a key indicator of the market's strength, despite the growing acceptance of recently-introduced daily index prices.

Spot prices for all metallurgical coals - from premium hard coking coal to semi-soft, pulverised PCI and anthracite - have slumped by over 25 percent since July with iron ore's slide because of the global steel glut and China's slowdown.

Japan is the world's largest importer of coking coal but the steep growth projected for medium-term demand will be dominated by China and India, particularly for spot sales.

Major mining houses Anglo American, BHP Billiton , Rio Tinto ,, Xstrata and Vale have enjoyed the steel-driven boom but some are now shutting mines and cutting jobs. Output cuts may eventually bite and start to reverse the price trend.

This is a significant short-term concern for the mining majors whose fortunes depend on China continuing to see a construction boom requiring iron ore, coking coal, cement and power.

"At the end of August the Q3 quarterly price of $225, which was settled in June, looked extremely strong and now even $185 is certainly looking too high," said Jim Truman, metallurgical coal analyst at Wood Mackenzie.

Metallurgical coal for years was one of the commodities in tightest supply and with the strongest margins because soaring construction in China and India absorbed ever-rising quantities which could hardly be shipped quickly enough, spurring coal mining M&A and investment.

But new sources of supply, global economic woes and more recently, China's slowdown, have eroded producers' margins to the point where some are selling at below their cost levels.

Mongolia is increasingly eating into Australia's share of imports into China.

Since the 2011 tsunami which slashed Australian exports to Japan, end-users everywhere were forced to try blending lower-cost, lower quality metallurgical coals from Colombia and the United States and have become adept at saving money by doing so.

Prices for iron ore, also used to make steel, may be close to the bottom but metallurgical coal, particularly of lower quality types, can fall further.

"Iron ore is near the bottom and starting to creep higher but coking coal is more vulnerable and has further to fall," said Marcus Garvey, analyst with Credit Suisse.

Iron ore spot prices fell last week to a three-year low of $86.70 a tonne, having slumped by 36 percent in two months while hard coking coal spot prices have sagged by 25 percent from around $200 in June to $150, leaving end-users and traders reluctant to do fresh deals when prices are vulnerable and demand uncertain.

"Coking coal prices have gone down 25 percent since June and will stay weak for a while because demand is relatively poor," said Peter Fish, managing director at UK steel consultancy Meps.

"The Chinese look to be reducing their rate of demand for steel and they are overstocked, so it's certainly likely that growth in demand for steel will be near zero in the next few months," he added.

CHINA PSEUDO STIMULUS?

China said last week it will spend $150 billion on infrastructure projects but many were already in the pipeline and are on a smaller scale than those funded by the cash transfusion which followed the 2008 crisis, raw materials suppliers and analysts said.

"This is a pseudo stimulus if you look at it closely, spot prices rose but there is almost no desire from China now to buy any kind of met coal, not hard coking, anthracite, semi-soft or any of the grades which they've got used to taking, it's extremely tough to sell at any price," said one Asia-based steel raw materials trader.

"The problem is not that prices have dropped and that's causing difficulties, the problem is steel demand in China and I don't think we've seen the worst of it yet," he added.

Metallurgical coal output is already being trimmed - cuts have happened faster and harder than many players had expected.

At least 10 million tonnes of U.S. coking coal output has been cut this year, and more cuts are likely by producers who cannot export profitably.

Consol, one of the U.S.'s biggest coking coal exporters, last week said it was idling its 5 million tonnes a year Buchanan coking coal mine for 30-60 days due to the depressed market.

"Metallurgical coal will see more international tonnage coming under pressure, for example, BHP cutting production in Australia," said Colin Hamilton, head of commodities research at Macquarie Bank.

Australian miners face a margin squeeze because spiralling costs and currency have propelled Australia close to the top of the global league table of coal mining costs.

"In 2011 all the analysts wanted to know about mining costs and profits, it was all about acquisitions but 12-18 months later miners are burdened by debt and there's no guarantee of $200-250 a tonne prices forever - people failed to see the underlying issues," a major U.S. coal trader said.

Reuters