RESEARCH: Iron ore, coking coal prices to continue to diverge

• We do not consider the average iron ore fines price for September so far above $125 per tonne cfr Qingdao to be sustainable. The bullishness is not likely to last in the long term as we expect Chinese demand growth to slow down. A key factor boosting Chinese steel demand so far has been the stimulus policies from the authorities to support the post-Covid-19 economy. The result has been significant with a stronger-than-expected recovery in China, especially compared to the rest of the world. But the stimulus and the monetary easing is not expected to last, meaning there may be more challenging times ahead for Chinese steel mills. First signs of this slowdown are already present in the market, including slowing blast furnace utilization rates and port inventory build-up.
• In the coking coal market, the dynamics in the differential for the Fastmarkets’ cfr Jingtang coking coal indices over and above the equivalent fob Dalrymple Bay Coal Terminal indices hint at the diminishing role of China in the global coking coal market and the recovery of demand in the rest of the world. The differential retreated in September to date after climbing consistently over the course of the previous four months. We understand that this phenomenon reflects metallurgical coal demand distribution between China and the rest of the world. While Chinese steelmakers have been running at record-high utilization rates, leaving not much room for further demand growth, we have argued that recovery is the only way forward for many ex-China markets post-Covid due to the severe impact on economic activity the measures aimed to prevent the spread of the virus had.

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