Steel companies like U.S. Steel Corporation (X), ArcelorMittal (MT), and AK Steel (AKS) use coking coal as an input for their blast furnaces. Coal was written off by some analysts. However, coal reclaimed its glory last year. Supply-side issues in Australia and China’s restriction on mining days triggered a sharp rally in coking coal. As supply concerns eased and China relaxed its restriction on mining days, coking coal prices retreated from their peak.
Higher coking coal prices led to higher 2017 contract prices for steel companies (XME). We should remember that annual coal contracts are the norm for US steel companies. U.S. Steel Corporation said that it expects its 2017 delivered coal costs to rise by $19 per ton in 2017. AK Steel managed to dodge the big spike in coking coal prices by negotiating its coal contracts early. During the company’s 4Q16 earnings call, AK Steel noted that its coal costs only rose ~5% for 2017.
Looking at the current market scenario, seaborne coking coal has been consolidating near the $200 per metric ton level. Unlike last year when prices rose too fast and too soon, this year’s price rise has been more gradual and fundamental. Global steel production is on an uptrend and Chinese steel production is hitting one record after the other. These factors bode well for coking coal prices (TECK).
If we see an increase in steel companies’ 2018 coal contract pricing, it could lead to higher input costs. If steel companies aren’t able to pass on higher input costs to buyers, they could see a margin compression next year.
In the next part, we’ll look at the recent trend in iron ore prices.