BHP Billiton and Rio Tinto are to deliver a crippling blow to Asian steel firms this week by demanding a 200 per cent increase in coking coal prices that their customers will have no choice but to accept.

Sources at Nippon Steel said it was “basically inevitable” that new contracts for coking coal delivery would be set at $300 a ton. Other leading steelmakers, including JFE, of Japan, and Posco, of South Korea, apparently are close to signing contracts at that price.

The sudden swing to a seller's market and the tripling of the coking coal price has sent a wave of panic through corporate Japan. It has exposed the weakness of a resource-poor economy that relies on imports, and given other Japanese industries cause for concern.

Power companies, for example, face similarly injurious increases in the thermal coal price when their contracts are negotiated this month.

The steelmakers, who have been in negotiation with the Australian miners for several months, have little scope for manoeuvre. Floods in Queensland and surging demand from China's construction sector have propelled spot prices of coking coal to record highs of $350 a ton.

The expected increase in the long-term contract price will generate potentially devastating knock-on effects throughout the steel industry, which has grudgingly accepted large price increases for iron ore. The 2008 onslaught of commodity price surges is expected to cost the Japanese steel industry an additional £15 billion a year - enough to wipe out about 10 per cent of pre-tax profits.

The business models of Japanese and Korean firms, which have squeezed substantial efficiencies from their operations, are expected to buckle under the pricing pressure.

Tokyo Steel Manufacturing - one of Japan's larger players - is to take the extraordinary step of halting new export contracts because of a raw material price environment that it said it could no longer control. Car companies and shipbuilders are expected to resist any move by the steelmakers to pass the price increases through the food chain.

BHP and Rio recently imposed a 65 per cent price increase for iron ore delivery contracts with their big Asian customers - a reflection of the astronomical rises in spot market prices of raw materials, shipping costs, energy costs and throbbing demand from China.

Japan annually imports about 7.5 million tons of coking coal and has no domestic supply. About two thirds of that comes from Australia, with BHP the chief contributor.

One effect of the price increases has been to heighten Asian fears of a Rio-BHP merger. Equally terrifying has been the growing power of ArcelorMittal and its ever more aggressive efforts to secure resources by cutting out the middleman and simply buying mines.

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