Australia–Japan coking coal trade: A hedonic analysis under benchmark and fair treatment pricing

Abstract

Given Japan's dominant position in the Asia–Pacific regional coal market and the continuing relatively low profitability of Australia's coal industry, the influence of the Japanese steel mills on coal pricing arrangements between Australia and Japan remains an issue in Australia. In Japanese fiscal year (JFY) 1996, the Japanese steel mills replaced benchmark pricing with the “fair treatment” pricing system whereby coal contract information is kept confidential. In this paper, Quandt's switching regime model is used to test for structural change in hedonic pricing relationships in the important Australia–Japan coking coal trade between JFY 1992 and 1997. There is statistical evidence of significant structural change in JFY 1996 for hard coking coal and in JFY 1995 for semisoft coking coal (when soft coking coal was merged with the semisoft category). The goodness of fit of the regressions is lower in each recent period. It is concluded that price discovery in the annual coal negotiations, particularly for hard coking coal, is relatively more difficult under fair treatment pricing.