• Chinese crude steel production outperformed our expectations with its recovery since the Covid-19 pandemic lockdowns. Crude steel output was up by 2.3% year-on-year in the first half of 2020 to 503 million tonnes, and we have revised upward what was initially a more bearish forecast for this year. We now estimate that production will recover and grow year-on-year in 2020, assuming that there is no second wave of coronavirus infections which significantly hampers output in the second half of the year. There is also a recent announcement of new infrastructure spending which could boost steel demand. China remains the largest iron ore consumer and driver of demand, so although we expect that there will be a gradual downward price correction in the second half of the year, continued robust Chinese seaborne iron ore consumption is likely to cushion the fall.
  • In the seaborne metallurgical coal market, we expect that support for prices in general will come from a recovery of demand from markets outside China, as well as the recent widening of coke margins and relatively high domestic coal prices in China. We have argued that some coal-consuming markets - such as the EU, India and Japan - have shut down so many operations that recovery is realistically the only option, with industrial activity gradually resuming.
  • In the meantime, there may be some pressure on first-tier coal premiums. Judging by the widening steel price spreads in recent months, as well as high blast-furnace operating rates, Chinese steelmakers may once again shift their preference from cost-efficiency to output optimization in their procurement strategies, and use more higher-grade ores. Data suggests that when Chinese integrated steel producers choose to consume more such higher-grade iron ores, the premium for first-tier coal decreases. This is because integrated mills’ demand increases for coking coal, and especially for higher-quality coal, so as to remove the impurities in lower-quality iron ores, but such demand reduces when a higher proportion of higher-grade iron ores is used.

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