Usually, Iron ore and coking coal move in lock step. The two raw materials for steel production are driven by the same demand factor, – at least for seaborne trade consumption – by the Chinese, Japanese and Korean steel industries.
Often production comes from the same or similar multinational suppliers – Rio Tinto Group, BHP Billiton, Glencore PLC.
China’s domestic producers, like its iron ore mines and steel producers are state owned. Both raw materials have experienced massive investment surges this decade as high prices encouraged producers to boost production and both have suffered aggressive price falls as supply has hit a weakening demand market.
The Iron Ore Mini-Rally
Recently, though, prices have diverged. Iron ore as we wrote last week, has gone through something of a mini-rally driven in part by dwindling Chinese port stocks prompting the impression supply is more limited than originally thought and by announcements of mine closures among smaller producers in places such as Iran and Mozambique.
As Iron ore falls reversed and the price rose 30% since the start of April, coking coal could only look on from the sidelines, continuing its fall from over $300 per metric ton four years ago to below $90 now. The latest quarterly metallurgical coal prices have been concluded at the lowest level in more than a decade as quarterly contract prices follow spot prices downward.
Coking Coal: What Are We? Chopped Liver?
Unfortunately for coking or metallurgical coal, even the token supplier rationalization we have seen in iron ore has not been mirrored for coal. Chinese producers, many state owned have actually increased production last year and, according to the Financial Times, China has become a net exporter of coking coal and its derivatives. China’s coking coal imports fell 24.2% in the first four months of 2015 over the same period last year, no doubt aiding the statistics as marginal suppliers were squeezed out the market.
North American Supply Displaced
Australia still supplies some 50% of imports but Mongolia is becoming increasingly important at the expense of Canadian and Russian supplies. To the extent that the US can no longer competitively supply China. Canadian material may also be displaced as prices in North America will be correspondingly depressed further in the second half of the year as suppliers chase the local market.
The most recent statistics from China quoted by Reuters suggest domestic coking coal may finally be plateauing. May’s number was down 4.2% compared to a year ago and that suggests even domestic suppliers are struggling. There is little on the horizon to offer coal suppliers much optimism but steel mills and steel consumers will welcome the reduction in raw material costs for the rest of this year.