CRU: Iron ore finds cost support while Chinese demand underpins seaborne met coal pricing

For the next month, CRU forecasts that iron ore demand will fall month over month (m/m) while metallurgical coal to be stable.

In China, steel demand is expected to weaken further over the next month. Although steel margins have narrowed, they remain sufficient to support hot metal production. However, weaker demand will continue to limit steelmakers’ ability to pass on higher coke and coking coal costs to buyers. Eventually, steel production will fall, and we expect the initial decline to be modest, followed by a steeper decline later in the year. This will weigh on iron ore demand. By contrast, metallurgical coal demand from the seaborne market and Mongolia will rise to fill the gap left by the mine accident.

In India, delayed and weaker monsoon rains should support construction activity, although this will be offset by high temperatures, labor shortages and inflation. Low reservoir levels in major cities could restrict water supply to construction sites, further dampening steel and raw materials demand.

In Japan, Korea, and Taiwan (JKT), the steel demand recovery is now expected to be slower than previously forecast, but it will be stronger m/m in the coming month. Demand destruction caused by the Middle East conflict in external markets will continue to weigh on auto exports while machinery exports remain firm. In Japan, there have been increasing inquiries from construction companies to bring project forward before further increases in interest rates and operational costs, but the rainy season may limit construction activity. Overall, we expect raw materials demand in the region to be higher m/m.

Iron ore

Iron ore prices are expected to remain rangebound at current levels, with lower prices and still-elevated freight rates having already triggered supply curtailment among higher-cost producers and tightened the market. This suggests that iron ore prices have found a cost floor and will remain supported. Downside risks to this view stem primarily from strong Australian supply during the peak season and a continued decline in freight costs.

Eroding steelmaking margins in China are shifting procurement appetite towards lower-grade iron ore, while the lump premium faces downward pressure from weakening buying preference and robust Australian supply.

Metallurgical coke and coal

Supply tightness stemming from the Shanxi mine accident has pushed Chinese hard coking coal (HCC) prices to a $15 per metric ton premium to seaborne prices. While idled mines are expected to return to the market briefly, the impact is likely to persist, as some mines may be unable to operate above nameplate capacity given the renewed emphasis on safety. This should support seaborne imports into China and help underpin prices.

Chinese coke margins remain under pressure, as coking coal prices have risen faster than coke prices. An eighth round of price increases since April now looks increasingly likely. Meanwhile, the upcoming decision on India’s coke anti-dumping duty revision will be crucial, as a ~$15/mt reduction in Indonesian duty could shift buyer preference back towards coke. Curtailment of hot metal production at RINL’s Vizag Steel plant after fatal accident in combination with seasonal weakness in steel demand in India is a downside risk to metallurgical coal prices.