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Steel raw materials demand rises on stronger yuan, restocking activity

Steel raw materials — iron ore and metallurgical coal — prices rose late January to early February due to Chinese buying interest ahead of the Lunar New Year holidays and strengthening performance of the yuan against the US dollar.


S&P Global Platts assessed the 62% Fe IODEX & TSI Iron Ore Fines 62% at $78.25/dry mt CFR North China Wednesday, up $3.4/dmt or 4.5% on the month, and premium low-vol CFR China climbed $11.50/mt or 5.1% on the month to $233.50/mt CFR China Wednesday.


While historical data by Platts show that these two raw materials may not always move in unison as they share different fundamentals, both the commodities have seen a strengthening in prices due stronger yuan and increased restocking activity.


According to Platts data, China imports 69% of the world’s iron ore. However, the dominance is not reflected in the coking coal market. Seaborne coking coal acts as an alternate viable option for Chinese steelmakers, especially northern mills, when they are priced competitively compared to domestic coal.


However, by the end of January, both the raw materials started to move in the same direction as Chinese buyers started their restocking prior to the Lunar New Year holidays.


STRONGER YUAN

Since the start of 2018, yuan has been strengthening against the US dollar. According to Platts data, yuan was at its strongest on February 8 at 6.2822 Yuan to 1 US dollar, rising 3.56% on the month.


With the strengthening of yuan, the arbitrage between yuan-denominated iron ore port cargoes and US dollar seaborne cargoes narrowed, boosting the demand for imported iron ore materials.


In the coking coal market, several market participants said that a favorable exchange rate encouraged the procurement of seaborne coking coal, allowing them to enjoy a significant cost savings of $9-$10/mt in early February compared to January.


RESTOCKING NEEDS

In December, Chinese buyers were out of the seaborne coking coal market as domestic coal was available at cheaper rates.


Low sulfur domestic coal, however, started to strengthen in January as supply came under pressure due to the ongoing winter production cuts. This in turn led Chinese buyers to return to the seaborne coking coal market by the end of January, which by then was facing downward pressure as sellers were looking to liquidate their cargoes.


Platts assessed the CFR China equivalent of Shanxi PLV at $240.29/mt on February 14, putting the domestic-seaborne price arbitrage at $6.79/mt, with the seaborne material being the cheaper one.


Furthermore, the transportation of domestic coking coal took a backseat in early January when the movement of thermal coal was prioritized. Consequently, steelmakers turned to seaborne coking coal, a cheaper alternative by then, as the supply of coking coal supply was no longer reliable.


According to Platts spot trade data, from late January to early February, a total of 27 trades took place across the first- and second-tier seaborne coking coal. Of these transactions, 24 were concluded to Chinese buyers.

Source: Platts

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