Coking coal has surpassed iron ore to become the most expensive raw material input for steel makers, following a blistering rally in prices in the recent weeks, an analysis by S&P Global Platts showed.
Global steel mills from East Asia to India, Europe and Brazil have been scrambling to procure metallurgical coal amid a historic rally caused by tight global supplies and disruption in trade flows due to the COVID-19 pandemic.
A Platts calculation based on 1.6 mt of iron ore and 0.7 mt of non-premium hard coking coal required per ton of hot metal, estimated iron ore cost at $150/mt, below coking coal cost at $350/mt. The calculation used the Platts benchmark IODEX and Low Vol HCC FOB Australia, while not considering the delivery time offset for both the raw materials, as well as other expenses including labor, energy and processing.
Platts assessed Premium Low Vol HCC at a 10-year high of $354.00/mt FOB Australia on Sept. 16. The rally in coking coal was partly enabled by the recent collapse in iron ore prices, several market sources said. The iron ore benchmark IODEX 62% Fe fell by $128/mt to $94/mt CFR China Sept. 20, down 58% since mid-July.
Coking coal was now more expensive than iron ore from a budget perspective, with the overall input cost for the raw material rising to between 50% and 60% as of Sept. 20 since end-July, considering the sinter and pellet consumption rates, a European steel mill source told Platts.
An end-user in India said that coking coal now accounted for over 60% of the total input cost required in producing hot metal for west Indian mills. This end-user's cost estimate was based on the PLV price, sea freight and other logistics expenses as of Sept. 21.
Tightening global supply for seaborne coking coal in the second half of 2021 has resulted in lower spot transaction volumes, pushing the coking coal market higher, sources said. Ex-China spot demand for seaborne coking coal increased by about 280% on the year in first half of 2021, Platts data showed.
Despite the short supply, coking coal spot cargoes have seen higher buying interest from the traditional international markets, including, Japan, India, Europe and South America, over the past few months, sources said.
"You have the steel raw materials [of iron ore and coking coal] offsetting each other, and on the other hand, steel prices have remained strong in many parts of the world, which seems to justify the buying interest from end-users for coking coal even at those elevated levels," an international trader said.
Coking coal cost surge worst for Chinese mills
In China, the surge in coking coal costs appeared to worsen, with the raw material making up between 50%-70% of the input costs to produce hot metal, according to a recent market survey by Platts. A source at a steel mill in Shandong told Platts that the mill's estimated cost of coking coal had increased to about 70% of the total raw material input since May.
"Rising domestic prices since May have made the seaborne materials more attractive for east coastal mills like us, as imports were relatively cheaper and this could help save transportation costs by Yuan 200-300/mt, compared with sourcing from the Shanxi Province," the source at the Shandong mill said.
Platts assessed Premium Low Vol HCC at an all-time high of $562.00/mt FOB Australia on Sept. 16. Meanwhile, domestic Shanxi PLV grades were assessed at $562.29/mt on CFR China equivalent basis. About 90% of the Chinese met coal consumption is dependent on domestic production, market sources said.
As iron ore costs have dropped below 50% of the total hot metal production cost, from a typical level of 60%, since July, coking coal is now the biggest input cost, a source at a Hebei-based steel mill said.
The divergence between seaborne met coal and iron ore prices has accelerated since late July, with premium hard coking coal gaining $189.5/mt, while medium-grade 62% Fe iron ore fines declining $91/mt basis CFR China, as of Sept. 14, according to Platts data.
"We were able to purchase the expensive coking coal, thanks to the falling iron ore prices that helped offset each other in the mix and allowed us to still profit from the finished steel markets", a source at a steel mill in Northeast China said.
Profit margins at Chinese steel mills were estimated at $110/mt for domestic HRC, and $85/mt for domestic rebar, as of Sept. 20, according to Platts data.
Chinese steel mills continued to source premium hard coking coal from the US and Canada, and injected pulverized coal from Russia, amid an unofficial import ban on Australian coal, sources said. China Customs data also showed trade flows for softer coals from Indonesia, Colombia and Mozambique over recent months.
Coking coal cost had risen to 33% of the overall production expense for hot metal as of Sept. 20, including other inputs such as labor, energy and processing, from an average of 25% in the past, according to a major steelmaker in Shanghai.
Source: S&P Platts