Guest essay by Eric Worrall
Coal, particularly “coking coal” used for smelting steel, has staged a tremendous comeback in the last few months, thanks to a large scale Chinese buying spree. The rise in coking coal in particular is dragging up the price of related products, such as iron ore. But what is driving this sudden surge in coal price?
Coking coal’s rally fires up iron ore
Chinese iron ore futures have surged 6 per cent to the highest in more than two years amid rising steel prices, playing catch-up with the strength in coking coal.
Firm steel demand in the world’s top consumer and producer and higher raw material costs are supporting prices of the commodity. A shortage in coking coal has driven prices higher, but iron ore is gradually keeping up.
The most-traded January iron ore on the Dalian Commodity Exchange climbed 6 per cent on Tuesday to hit the exchange-set ceiling of 471.50 yuan ($US70) a tonne, its loftiest since August 18, 2014. It is the biggest percentage gain since March 8.
The most-active January coking coal rose 4 per cent to a contract high of 1288 yuan a tonne. Coke soared as much as 5.9 per cent to 1662.50 yuan per tonne, the highest since December 5, 2013.
According to a story published the start of October, the price rise is so sudden it is seriously disrupting normal market pricing mechanisms.
CHART: Coking coal surge could kill quarterly pricing
The stunning rise in the price of coking coal shows now signs of reversing, and the nearly three-fold rise in the price of the steelmaking raw material since hitting multi-year lows in November last year has pushed the quarterly benchmarking system to breaking point.
Metallurgical coal was exchanging hands at $213.40 on Tuesday according to data provided by Steel Index as it consolidates at higher levels following weeks of panic buying not seen since 2011, when floods in key export region in Queensland saw the price touching to $335 a tonne.
What is driving this abrupt rise in the price of coal and iron ore?
Most pundits seem to assume the still ongoing Chinese housing and infrastructure boom is responsible.
But there is another explanation which, if correct, would neatly explain the recent global coal and iron ore price spike.
Both Donald Trump and Hillary Clinton have promised to spend 100s of billions of dollars over the next few years repairing America’s crumbling infrastructure. To the Chinese this must seem like a sure thing – they are simply positioning themselves to be the main supplier of raw materials for the coming US infrastructure boom.
EW: The US infrastructure explanation is speculative – please don’t bet your shirt on it, then blame me if your bet doesn’t work out.