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Iron ore/coking coal CFR China spot price relativity hits 10-year high at 99.6%

New York — Prices for iron ore and coking coal, two key raw materials in steelmaking, delivered into China have moved in opposite directions since April this year, reaching virtual parity this week in a highly unusual event.

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Falling premium low vol coking coal prices on a CFR China basis together with strengthening in the IODEX 62% Fe CFR North China benchmark has pushed iron ore to coking coal spot price relativity to 99.6% for the first time in a decade, S&P Global Platts data shows.

Platts assessed IODEX 62% Fe CFR North China at $118.00/dmt August 4, up $1.65/mt from August 3, and Premium Low Vol PLV at $118.50/mt CFR China August 4, unchanged from August 3.

The average spot price relativity between iron ore and coking coal over the past 10 years is just 57%, according to Platts data.

The IODEX 62% Fe CFR North China is up 26.6% from the start of the year till August 4, with extensive stimulus packages introduced by the Chinese government to help weather the demand shock caused by the coronavirus pandemic supporting prices, while supplies from key exporter Brazil were subdued for a prolonged period as the monsoon season this year ran on until May, while the coronavirus outbreak also forced some mine closures in the country.

Platts Premium Low Vol CFR China prices meanwhile are down by 22.5% from the start of year till August 4.

The high relativity between the two ingredients may be set to continue for now.

Market sources said that the iron ore prices are likely to remain supported in the near term as Chinese steel mills continue to enjoy healthy margins driven by robust downstream steel demand.

Furthermore, as demand for iron ore from other markets improves with lifting of lockdowns, supplies may be diverted elsewhere, creating more upward pressure on prices despite a gradual recovery in iron ore supply from Brazil.

The slump in seaborne metallurgical coal prices was largely due to the demand destruction led by coronavirus pandemic, which resulted in multiple steelmaking countries entering a lockdown in the second quarter.

Much of the spot supply of coking coal flowed into China during the second quarter, sending prices on a downward spiral.

Currently, many countries like India, Japan, Korea and Europe are going through a recovery phase in their steel production, but China, a key spot market participant, is grappling with limited quota availability, denting its demand for coking coals.

Chinese iron ore imports totaled 547 million mt in the first half of 2020, up 10% year on year. Over January-June, China imported 38.12 million mt of coking coal, up 5% from the same period last year.