High-grade iron ore premium set to fall with coking coal prices Report

Insight 11 January 2017

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Report summary

High coking coal prices have incentivised Chinese steel producers to purchase more high-grade iron ore fines. As a result, the price gap between high-grade and low-grade fines has widened to a four year high. This insight explores the rationale of this phenomenon by analysing the cost of ironmaking in three different Fe grade scenarios. When coking coal prices are high, steelmakers can reduce costs by using more high-grade iron ore fines. However, we believe the generous premium enjoyed by high-grade iron ores could be short-lived and looks set to diminish for two reasons. Firstly, we expect coking coal prices to ease. Secondly, high-grade iron ore supply will increase much faster than supply of other iron ore grades.

Executive summary
High-grade iron ore premium boosted by rise in coking coal prices
Met coal contributed more to cost increase than iron ore in 2016
Low-grade ore consumes more coke
Low-grade scenario costs more when coking coal is expensive
Iron ore fines premium set to fall

Tables and charts

This report includes the following images and tables:

Spread between high- and low-grade fines in relation to coking coal price
Iron ore fines 65% Fe to 62% Fe
Met coal share of ironmaking costs

Met coal contributes more to the increased ironmaking cost (RMB/tonne)
Consumption rates based on three different sinter blends
Consumption rates for the three scenarios
Breakdown of cost changes among the three scenarios with a high coking coal price (RMB/thm)
Breakdown of cost changes among the three scenarios with a low coking coal price (RMB/thm)
Supply of high-grade ore will increase much faster than the overall supply
Iron ore price outlook for iron ore fines