- Iron ore prices climbed further last week and we expect the elevated levels to remain into the next month. In particular, further upside will come from blast furnace (BF) capacity, which was reduced in Europe, Japan and the United States and has now come back online after restrictions started to be removed. With Covid-19 spreading fast in India, there is also a threat to exports from the country that add to the near-term upside risks to iron ore prices.
- BF operating rates in China are running at high levels, fueling not only iron ore demand but potentially also supporting scrap consumption, we understand. BF utilization reached 94.7% last week, the highest level on record starting from March 2015. This has likely increased scrap use and supported prices, with the majority of scrap consumed for steel production in China being via the integrated route. Mini mills' operating rates have been above 80% since late May.
- Another illustration of strong Chinese demand for iron ore has been the jump in freight rates. On the route from South Africa's Saldanha to Qingdao, freight rates rose by 44.6% week on week to $11.35 per tonne on June 15, while on Brazil's Tubarão-to-Qingdao route rates jumped by 34.2% to $14.90. Gains on the Australian Dampier-to-Qingdao route were 18.2% to $6.50.
- Metallurgical coal markets remain under pressure from struggling demand ex-China. Two major markets for coking coal exports from the US - Brazil and India - also happen to be hot spots for Covid-19. The two countries make up about one-third of total exports, with another third going to Europe. Unlike the US, Australia has shipped more than a third of its coking coal to China in the year to date, but India is just a little behind in terms of volumes. As a result, seaborne coal prices have remained under pressure since late March.
- The demand situation remains challenging for major coking coal suppliers who do not heavily rely on China-bound sales, therefore, the pressure on prices will likely persist. Yet while import markets gradually recover from coronavirus in the coming months, the European market being one example, we do not expect prices to drop significantly further. Moreover, there has been some recovery in steel mills' operational margins, as well as in implied coke margins.
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