If you had to take commodity markets as a guide, you’d be right in being confused at the conflicting messages they send of boom and bust at the same time.
Take iron ore and coking coal – two tightly linked commodities in the steelmaking process and more tightly bound in China than anywhere else because of the sheer size of the sector and the vainglorious activities of the national government which seem to be working against both.
While iron ore prices tumbled to levels well below their June 30 closes on Wednesday, coking coal futures prices in China remained above $US400 on Thursday with the MB Fastmarkets price at an all-time high of $US431.03 a tonne.
Both are due to Chinese government policies – ordering cuts to steel production to reduce carbon emissions and hurt Australian iron ore shippers, the other is linked to the more than yearlong ban on imports of Australian thermal and coking coal that, with disruptions in China, NSW and Queensland shipments, Indonesia and Colombia, plus Covid infections in Mongolia, parts of Russia and a shortage of ships have seen prices of thermal and coking coal more than treble in the past year.
China’s ban on imports of coal from Australia has come at the wrong time – there’s a shortage of coking coal for the steel sector, even at lower levels of production under the carbon cutting edicts. For the reasons above, supplies have not been coming from alternate markets like Mongolia, Russia, the US and Canada.
Thermal coal prices have jumped for the same reasons, with the crackdown on mine safety in China a big factor, along with Covid Delta outbreaks, severe flooding across central China and Sichuan with flooding and bad weather in Indonesia interrupting shipments from China’s main coal supplier.
There have been numerous media reports of brownouts and rolling power outages across parts of China because of the thermal coal shortage.
This has also seen LNG prices soar past $US13 a million British Thermal Units (the pricing method for gas)
Chinese coking coal futures soared 8% to hit their daily upper limit and an all-time high on Thursday, fuelling a rally in coke prices too, as sluggish imports and production control at mines saw new concerns over the stability of supplies.
Mongolia reported most single-day COVID-19 cases on Wednesday indicating imports of coking coal from the country could remain under pressure in September.
At the same time, China’s National Mine Safety Administration continues to crack down on safety at thermal and coking coal mines across China, meaning a fall in local supplies at the wrong time.
Reuters reported that the most-active coking coal futures on the Dalian Commodity Exchange, for January delivery, jumped 8% to 2,669 yuan ($412.99) a tonne -that was well behind the MB Fastmarkets index price.
Reuters reported that benchmark iron ore futures (for 62% Fe fines) inched up 0.3% to 781 yuan a tonne, recovering from Wednesday’s plunge which saw index prices across Asia lose 6% to 8%.
Spot prices of iron ore with 62% iron content for delivery to China, compiled by the SteelHome consultancy, dropped $US11 to $US147.5 a tonne on Wednesday while the MB Fastmarkets index price lost $US10.24 (or more than 6%) to $US143.43 a tonne.
That means the price of 62% Fe Fines from the Pilbara are now down 331% since the end of June and 21% since the end of July.
The weak activity report for Chinese manufacturing from Caixin/Markit didn’t help as it showed the first contraction since April last year. This was after the official survey on Tuesday showed China’s services sector sliding into contraction as well.
The price of 58% Fe Fines slumped more than 8% to $112.72 a tonne and the price of 65% Fines from brazil slipped $US9.70 a tonne to $US162.30 a tonne.
Earlier in the week, Baoshan Iron & Steel, the listed part of Baowu, China’s biggest producer, warned of the potential for more falls in iron ore prices in coming months.
Others agree:
“We expect China’s steel curtailments to be targeted in 4Q when demand slows seasonally and air pollution is in focus (especially ahead of the Winter Olympics next February) and as a result we expect prices to stabilise in Sept/Oct before continuing to fall back below $100/tonne in 2022,” UBS analysts wrote in a recent note.
58% Fe Fines are only $US13 away from falling under $US100 a tonne.
