Responding to rising coking coal prices

The past year, soaring metallurgical coal prices have greatly affected the costs involved in producing pig iron, a form of crude iron which is the product of the blast furnace. Metal Bulletin Research’s Global Steel Cost Service details how coking coal and coke costs usually averaged around 35% of total pig iron production expenditure in 2014 and 2015 while iron ore stood for the majority of costs.

In the fourth quarter last year, coking coal overtook iron ore as the major cost in pig iron production and is now the most costly feedstock ingredient for each tonne of pig iron produced. Steelmakers have adapted by changing their mix of raw material in the blast furnace and are now using iron ores with higher Fe grades, which requires less metallurgical coal.

The turbulent prices for coking coal widened the gap between the spot price and the quarterly benchmark price, especially after the cyclone in March. This caused the collapse in negotiations of the quarterly contract price between Australian producers and major Japanese buyers.

Metal Bulletin recently reported that producers and consumers of coking coal have now begun to adopt index-linked prices as a pricing mechanism for their quarterly contract purchasing of seaborne feedstock, instead of settling on a contract price for the June quarter.

What lies ahead?
After a year of surging prices, prices were expected to drop as export volumes from Australia returned to more normal levels. Metal Bulletin Research remained less bearish than most analysts and took first and second place in Metal Bulletin’s APEX leader board during the last two quarters.

Prices did not fall so harshly as many had predicted and revived again in the third quarter, climbing above $200 per tonne in September (fob Australia) as supply tightness persisted and demand remained strong, especially in China. Chinese dependence on imports have been rising for several years and we expect this to continue, as explained in more detail in the Steel Raw Materials Market Tracker

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