Depressed iron ore vs bullish coking coal
Iron ore prices have been falling since early July due to cues from the Chinese government that crude steel production in 2021 should not exceed that of 2020, a move that depressed demand for the steelmaking raw material.

Fastmarkets’ index for iron ore 62% Fe fines, cfr Qingdao stood at $112.06 per tonne on Tuesday September 28, down by 48.9% from July 1’s $219.32 per tonne.

Fastmarkets’ index for iron ore 65% Fe Brazil-origin fines, cfr Qingdao stood at $136.50 per tonne on September 28, down by 45.9% from $252.40 per tonne on July 1.

Meanwhile, coking coal prices have been trending upward since October 2020, when the Chinese government imposed a ban on Australian materials.

Increases since July have been more pronounced. Fastmarkets’ index for premium hard coking coal, cfr Jingtang was at $597.06 per tonne on Tuesday September 28, up by 94.7% from $306.59 per tonne on July 1.

Market sources say that while steelmaking raw materials typically follow a similar price trend, the differing fundamentals for iron ore and coking coal have resulted in strong negative correlations between their prices in recent months.

Fastmarkets’ data indicates that the correlation between prices for iron ore and coking coal swung to a strong negative in July. Since then, the correlation has been at least -0.65.

An indication closer to one or minus one suggests a strong correlation while that closer to zero suggests a weak correlation.



Iron ore demand
More and more provinces in China have gradually implemented restrictions on crude steel production since July. This is the single biggest factor that is limiting demand for iron ore in the second half of 2021, sources said.

Recent limits on industries’ energy consumption - and emissions - have depressed demand for iron ore further, they said.

Steelmakers that operate electric-arc furnaces have also been hit especially hard by these measures, a trading source in Shanghai told Fastmarkets.

“Other than the steel mills in Shandong, Yunnan, and some other provinces that have already adopted the restrictions on energy consumption earlier this month, a few provinces in northern China have also implemented such controls on electricity use recently," a buyer source in northern China told Fastmarkets.

As a result, more than 80 steel mills have either suspended their steel production or put their blast furnaces into maintenance, he continued.

"The energy restrictions have also caused lower run rates of blast furnaces, which have in turn caused less demand for iron ore," he said.

End users further down the supply chain such as manufacturers are also consuming less steel due to such restrictions being imposed on them as well.

Coking coal supply
But coke prices in China have remained high due to a lower supply of coking coal, sources said.

“On the one hand, China’s import of Australian coal has been restricted since October 2020, and imports from Mongolia are sometimes affected by Covid-19 restrictions.

“Imports from other regions such as South America could also be depressed due to high freight rates,” a trading source in Singapore said.

“On the other hand, China’s decarbonization drive and safety requirements have limited domestic coking coal supply, resulting in a lot of bullishness for their prices,” he added.

Mixed outlook
The outlook for iron ore demand in the months ahead is still mixed.

A trading source in southern China said that the restrictions on industrial energy consumption were not likely to ease soon.

“Thermal coal has a similar supply issue as coking coal. As a result, China’s power-generation sector is under financial pressure due to the high operating costs. And yet, they cannot raise electricity rates too much because it would affect people’s livelihood,” the trading source said.

“Amid the energy consumption restrictions, and particularly with winter emission curbs set to be implemented soon, demand for iron ore and prices could remain depressed until early 2022,” he added.

The trading source in Singapore told Fastmarkets that although this year’s pollution controls for the winter heating season were being intensified, particularly with Beijing hosting the Winter Olympics in February, these were largely confined within northern China.

But he does not expect this scenario to persist too far into 2022.

“Assuming that the Chinese government intends for 2022’s crude steel output to also remain the same as that in 2021, steel mills will have more flexibility to plan for the whole year instead of working to implement the massive reduction that they are doing now,” the source said.

“As such, mills in southern China that are undergoing fewer restrictions could recover soon, and their steel production in the first quarter of 2022 will likely be higher quarter on quarter, supporting demand and prices for iron ore,” he added.

Meanwhile, coking plants in China are not operating at high rates due to the energy consumption restrictions and the high prices for coking coal, a buyer source in southern China noted.

He expects the supply of coking coal to remain low during the winter, which, as a result, will cause prices to fluctuate at high levels in the first quarter of 2022.

But with the Chinese government continuing to scrutinize commodity prices, any major price increases could result in the implementation of new policies by Beijing to check the market.

If these measures materialize, the strong negative correlation between prices for iron ore and coking coal could weaken and result in return of stability to the market for steelmaking raw materials, the buyer source in southern China said.