Iron Ore Hoisted on Coat-Tails of Coal’s Record Rally in China

  • Coking coal futures surge 4.5% to a record close in Dalian
  • Iron ore benefits from higher steel price, output, Maike says

Iron ore is surging thanks to its bulk-commodity compatriot, coal.

QuickTake Iron Ore Wars

Benchmark spot prices topped $60 a metric ton for the first time since August after futures in China went limit-up as coal’s rally pulled steel and other raw materials in the supply chain higher.

Spot ore with 62 percent content in Qingdao climbed 4.5 percent, the most in almost three months, to $61.96 a dry ton Tuesday, according to Metal Bulletin Ltd. The contract for January delivery on the Dalian Commodity Exchange surged 3.9 percent.

“Iron ore alone can’t make steel, it needs the help of coking coal,” Dang Man, an analyst at brokerage Maike Futures Co. in Xi’an, China, said by phone. “The shortage in coal supply right now seems unlikely to improve before year-end. That’s driving steel prices and production higher, benefiting iron ore too.”

After three years of slumping prices as mine supply rose and China slowed, iron ore has gained 42 percent in 2016 as Asia’s top economy boosted stimulus. Steelmakers in the country that produces half of world output have fired up plants after stronger demand boosted prices and expanded profit margins. Coal prices have soared in 2016 on tight supplies, and HSBC Holdings Plc has said the surge in coking coal will probably keep global steel prices elevated.

Prices of hot-rolled coil climbed as much as 3.5 percent to 2,904 yuan a ton on the Shanghai Futures Exchange, the highest since April on an intraday basis, before ending at 2,884 yuan. Coking coal futures in Dalian jumped 4.5 percent to a record, while coke rose 5.3 percent.

Blast Furnaces

Iron ore’s recent gains have taken place against a backdrop of mixed forecasts for the raw material. While UBS Group AG has highlighted the scope for renewed losses as mine supply expands, Toronto-Dominion Bank -- the top forecaster in a Bloomberg ranking -- expects rates to hold in the $50s.

Coking coal, or metallurgical coal, has more than doubled this year as output from China tumbles amid efforts by the government to cut overcapacity even as demand from mills improves. The commodity is mainly used to make coke, which is fed into furnaces with iron ore to make steel. 

China’s crude-steel output climbed 3.9 percent to 68.17 million tons in September from a year ago, according to the statistics bureau. Production rose 0.4 percent in the first nine months, bucking widespread predictions at the start of 2016 that output would post a significant drop this year.

“With steel supply increasing, we may reach a point where the price increases can’t be justified by higher raw-material costs anymore,” Dang said. “Mills’ profitability will once again come under pressure and the rally in steel will unwind,” hurting demand for iron ore, she said.

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