Analysis: Seesawing iron ore, coking coal markets prompt buy or sell quandary

Singapore — Seaborne iron ore and coking coal prices, which typically move in tandem, have strikingly diverged in 2020, with iron ore prices soaring since May and coking coal prices tumbling - leaving traders in a quandary about how to judge if it's a good time to buy or sell.

Seaborne iron ore prices overtook coking coal prices on a CFR China basis Aug. 6 for the first time since October 2010, when the two benchmark indices were first able to be compared.

S&P Global Platts launched the first daily iron ore spot price assessment, Platts IODEX, on June 2, 2008, and the first daily premium hard coking coal spot price assessment, Platts PLV, on October 1, 2010.

Over the past 10 years, the price differential between seaborne iron ore and coking coal prices has averaged $80/mt, with coking coal typically trading at two times the price of iron ore.

However, a precipitous rise in iron ore prices since May has seen the differential shrink to minus $2.40/mt in early August, the lowest since 2010.

Platts assessed the 62% Fe iron ore Index at $121.40/dry mt CFR North China Aug. 6 and Premium Low Vol hard coking coal at $119/mt CFR China.

Surging iron ore prices in recent months have been driven by strong demand in China as the country's early emergence from coronavirus-led lockdowns spurred rising steel prices and strong steelmaker profit margins.

The Chinese government's post-lockdown support of infrastructure construction and eased monetary policies has provided mills and traders with plenty of cash. Further, iron ore supply tightness has resulted in low Chinese port stocks, with sought-after medium grade Australian fines in particular in short supply.

In contrast, coking coal spot prices have fallen to multi-year lows in an oversupplied market. While global met coal production has been steady this year, the seaborne market has been hurt by global demand destruction related to the COVID-19 pandemic. China, the clearing spot market and the only bright spot globally, is also beginning to feel the pressure as import quotas are exhausted. Total Platts observed spot trade volumes fell 19% year on year to 21.4 million mt in the first half of 2020.

Based on Platts analysis, iron ore prices have increased their proportional cost in the blast furnace mix to an estimated 67% on Aug. 3. This is well above the historical average of 53%, meaning there has been an increase of 14% since May.

Met coal, on the other hand, has seen its estimated proportional cost fall to 33% from 47% over the same period. However, overall hot metal costs have remained below domestic steel scrap prices by approximately $60/mt, making iron ore the most cost-effective raw material for mills, even at the current elevated levels.

The interplay of iron ore, coking coal and steel scrap in China is seen as a barometer of the health of the two predominant steelmaking routes – blast furnace and electric arc furnace – and can suggest which route may have the upper hand in terms of competitiveness.

Market participants anticipate the divergence between iron ore and coking coal prices will continue in the near term as the fundamental picture seems to support the status quo. However, many traders are scratching their heads about the demand implications in such a fast-moving market, and finding it difficult to decide whether to buy or sell.