uploads///Coal

How Coking Coal Prices Are Driving Iron Ore Prices

By

Updated

Coking coal prices skyrocket

The price of coking coal, another steelmaking ingredient, has almost quadrupled since the start of the year. In a bid to control pollution and curtail its excess industrial capacity, China reduced workers’ hours in its coal sector. The country subsequently relaxed the mining day norm to control skyrocketing prices.

China has banned coal imports from North Korea to comply with the United Nations’ sanctions against the country. Glencore (GLNCY) has agreed to a first-quarter contract price of $285 per ton with Nippon Steel, the highest level since 2011.

Article continues below advertisement

Support for demand for iron ore

The rise in coking coal prices is also supporting the demand for iron ore, particularly the one with high Fe (iron) content. Higher grade iron ore enables steelmakers to reduce the amount of coking coal to produce steel. That has widened the premium between high grade and lower grade iron ore. The cost push inflation on steel prices is also benefiting iron ore prices.

Outlook for coal

The outlook for coal remains uncertain, given the many variables involved. If Chinese coal mills ramp up production, the rally in coal prices could fizzle. Higher Chinese demand has been a key driver of seaborne prices this year. It has, in turn, supported coal producers (KOL) such as Westmoreland Coal (WLB), Cloud Peak Energy (CLD), Alliance Resource Partners (ARLP), and Peabody Energy (BTUUQ).

Having said that, coal prices seem to have settled at higher price levels for now. Higher raw material prices could continue to support steel prices in the near term. That should be positive for iron ore prices as well. There should be a slightly negative impact on iron ore as well as miners.

Advertisement

More From Market Realist