Iron Ore price surge contributed to by coking coal pricing.

1. © Copyright The Steel Index 2016 1
MARKET WATCH
December 7, 2016
Coking coal surge contributes to iron ore rally
Already higher than anyone could have forecast, iron ore prices are defying gravity and soaring to new
heights. Whilst fundamentals have been more favourable than anticipated, it has been the surge in the
price of the other key steelmaking raw material - coking coal, which has played a large part in the recent
iron ore rally. This article examines some of the reasons why.
Iron ore has hogged the ferrous limelight for many years, with its sky high volatility and a rapidly evolving
market in index-linked trade and derivatives contracts. But the real story of this year has been coking coal, the
price of which has more than quadrupled over the space of a year, with ramifications for all parts of the steel
supply chain. And as iron ore prices enter another rally, the surge in prices for the black stuff appears to be one
of the key factors underpinning iron ore’s fortunes too. But why?
Put simply, steelmakers operating integrated furnaces are keen to use as little expensive coke as possible in
the burden, and this has impacted their buying behaviour for iron ore. In order to reduce their usage of
expensive coke, steel mills have been sweeping up as much high grade ore as possible, leading to soaring
premiums for high grade products such as iron ore Carajas fines (IOCJ), a Brazilian product with 65% Fe and
low impurity levels.
Historically, the price of iron ore has accounted for the higher share of raw material input costs for steelmaking
than coking coal. But this has reversed due to recent trends, making it more efficient to purchase more iron
ore.
“Recently steel mills, and especially those producing high-end flats steels, are enjoying good profit margins so
are looking to expand output,” one mill in northern China said. “If you increase the proportion of Fe in the
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65% Fe premium blows out as coking coal soars
Difference between TSI 62% and 65%
Iron Ore / Iron ore fines 65% Fe / Chinese Imports (CFR Qingdao Port)
USD/dmt
Iron Ore / Iron ore fines 62% Fe / Chinese Imports (CFR Tianjin Port) USD/dmt
Coking Coal / Premium JM25 Coking Coal / Chinese Imports USD/dmt

2. © Copyright The Steel Index 2016 2
burden mix, you can lower the percentage of coke used and also raise iron output,” he explained. “That is why
lots of mills are trying to buy high grade fines: on the one hand, you lower your costs, and on the other, you
maximize your profit”.
On December 2, the TSI JM 25 Coking Coal Chinese imports index stood at US$308.6/tonne, up 218% from July
1, 2016. Over the same period, the TSI 62% Fe iron ore benchmark rose 44%.The increase in the TSI 65% Fe iron
ore index has been even greater, standing 62% higher than at the beginning of the second half of 2016.
The surge in demand for high grade ores has led to a dearth of availability, both for seaborne material and in
the secondary market for port stocks in China. “IOCJ is limited in volume and high in price along the coastal
ports: we call it the Hermes of iron ore now”, one port stock trader explains, noting its premium over 61-61.5%
Fe grade PB Fines from Australia has doubled from RMB 50/wmt to RMB 100/wmt.
And with declining availability of 65% Fe ores, buyers have been eagerly seeking out the next best thing. Some
Chinese mills have sought out domestic concentrate, which is also typically high in Fe and lower in cost. But
following years of closures at Chinese mines and troublesome logistics, availability is still thin.
This has led to a demand boost for medium grade imported ores out of Western Australia, which are typically
the benchmark grades which form the bedrock of spot trade. Commonly traded Australian products such as
Pilbara Blend Fines also contain low silica, which also helps lower coke usage, further reducing the need for
expensive coking coal purchases.
Unsurprisingly, the gap between the 62% Fe and 58% Fe indices has also widened as participants place a
premium on additional Fe units and lower impurities. “There used to be RMB 30-50/wmt price gap between
Pilbara Blend (PB) Fines (61%) and Yandi Fines (57.2%)”, a trader at Rizhao port noted. “Now the difference is
RMB120-140/wmt.” In November the gap has, however, widened so far that buyers, now priced out of the 62%
market, are again picking up low grade materials. “There is obviously a limit as to how far you can lower your
coke rate,” the trader said.
More recently, iron ore prices have received a fillip from a spike in the on-shore futures markets. The widely
traded Chinese iron ore futures contract on the Dalian Commodities Exchange (DCE) has seen huge inflows of
interest from domestic funds looking to hedge against a weakening Chinese yuan, as well as a surge on global
expectations of a splurge on infrastructure by the incoming US administration.
And in recent weeks, premiums on index-linked (otherwise known as floating price deals) have soared for a
number of popular products, putting strain on contractual agreements where products typically are sold on a
flat-to-index price level. Last week, Australian mining giant Rio Tinto reportedly asked for an additional dollar
premium for contractual shipments of its PB Fines product, which has traded in the spot market with
premiums of more than US$4/dmt over index, leading to reports of mills in China re-selling contractual
tonnages into the spot market in an echo of the issues which broke the annual benchmark system in 2010.
Whilst Chinese steel output is trending down towards 2016 year-end and may see further impact from
environmental regulations this winter, few see much near-term relief from the coking coal pricing side. The
only thing for certain is that volatility is here to stay.

3. © Copyright The Steel Index 2016 3
Please contact:
Oscar Tarneberg o.tarneberg@thesteelindex.com + 86 13917 884 804
Kennith Yan yukun.yan@thesteelindex.com
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