Cornett's Corner

Iron Ore And Coal Miners Riding High On China’s Economic Stimulus

Iron Ore And Coal Miners Riding High On China’s Economic Stimulus: Tim Treadgold Feb, 2024

The price of steel in Asia is at risk of a steep increase thanks to unexpected strength in the price of iron ore and an upward surge in the cost of coking coal which remains an essential commodity for most steel makers.

Iron ore had been expected to trade below $100 a ton this year but since dipping to $98/t last May it’s been largely one-way traffic, briefly touching $144/t last month before slipping to $130/t and now said by Citi, an investment bank, to be heading back up to $150/t.

Iron ore from Australia being unloaded in China (Photo by Jie Zhao/Corbis via Getty Images)

Fortescue, the leading pure play iron ore miner in Australia, touched a 12-month share price high earlier today at A$29.95 ($19.46) thanks to the iron ore rally which is being largely driven by Chinese Government economic stimulus.

Coking coal has also been on a roller coaster ride, falling to $248/t in the middle of last year before rising to sell this week for $318/t and said by Morgan Stanley to be heading up to $340/t.

The combination of higher prices for the two primary ingredients in steel, iron ore and coking coal, is a perfect recipe for an increase in the steel price which, in turn, could feed into inflation.

On iron ore, Citi said last week that economic stimulus in China had sparked a rally across base metals (such as copper and zinc) as well as iron ore.

“We see these measures as positive and can see the risk rally continuing over the coming month on the back of further details regarding urban village redevelopment and anticipated total social financing figures,’ Citi said.

“In addition, we expect fundamentals to turn more price supportive over Chinese New Year in mid-February.”

Australian open cut coal mining. AFR Picture by ROBERT ROUGH (Photo by Fairfax Media via Getty … [+]

If iron ore’s price increase is a function of rising demand, the increasing price of coking (or metallurgical) coal is largely a function of insufficient supply.

A combination of limited development of new mines thanks to government and environmental opposition to coal and wet weather in Queensland, Australia’s major coal mining State, has fed into the coal price.

Seasonal flooding in Queensland’s coal regions has limited some exports of premium-grade coking coal keenly sought by steel mills.

Queensland flooding to git coal exports. (Photo by Peter Wallis/Getty Images)

Two years ago, heavy rain forced the closure of major rail lines, driving the price of coking coal up to a record $635/t, close to double where it is today.

A major beneficiary of the latest price increase is Whitehaven Coal which is in the process of acquiring two coking coal mines from BHP in a deal which has seen Whitehaven’s share price rise by 20% over the last six months.

Morgan Stanley said coking coal volumes from Australia have been in decline for four years, largely a result of declining capital expenditure since 2015 with miners finding it harder to sustain production let alone expand.

“Coal has been increasingly losing favor in the competition for capital against other mineral commodities,” Morgan Stanley said.

But a result of limited investment in new production and a rising commodity price has seen the financial return on coking coal for miners of the material reach a 15-year high.

Strong Demand, Weak Supply

“Given Australia’s position as the lowest cost producer, dwindling investment there has called for growth from higher cost sources, such as Russia and notable Mongolia,” Morgan Stanley said.

“Fragile supply comes at a time when demand shows no sign of faltering.

“Global hot metal (steel) production, the driver of coking coal demand, was up in 2023 (+0.5%) with India’s expansion gathering pace (+7.3%) and China posting growth as well (+0.7%).

“Continued momentum in India’s growth story should have a positive bearing on coking coal given India’s high import dependency.

“We see upside to prices from here as this plays out against an increasingly stretched supply base.”

Heidi

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