Material Matters: China, Thermal Coal And Alumina

Commodities | Aug 10 2018

A glance through the latest expert views and predictions about commodities. Iron ore in China; thermal coal; and alumina.

- China’s environmental worries underpin premium for high-grade iron ore
- High-grade thermal coal price rises, possibly due to action by suppliers
- Over-enthusiasm for lithium draws in new producers, threatens price crash
- Alumina prices bounce back as producers cut back output

By Nicki Bourlioufas

China’s environment policy boosts high-grade iron ore price

China’s anti-pollution push has driven a wedge between prices for high-grade and low-grade iron ore, with penalties increasing on impurities such as alumina, silica and phosphorus. The impetus is coming from China’s crackdown on illegal, polluting, outdated and small blast furnaces, which results in greater utilisation and better profitability of more modern and compliant steel mills.

Commonwealth Bank reports that the premium paid for high-grade ore with 65% Fe (iron content) over mid-grade ore with 62% Fe grew from 5% in mid-March to nearly 45% in late July, for an average of 15% across the four months. Iron ore with 62% Fe closed at US$66.95 a tonne on July 30.

CBA says: “While we expect that premium to pull back slightly from current levels, we believe the broad preference for higher grade ore is a structural change in the market.”

Citi says that back in the first half of 2016, the combined BHP Newman Fine penalties for alumina, silica and phosphorus were about US$0.40 per tonne, but this has exploded tenfold to about US$4 per tonne now. The biggest impact has been alumina penalties that are about US$8 for every 1% over 2.25%.

The penalty on silica content peaked at about US$4 per tonne, but is now back at US$0.20 per tonne. Rio Tinto’s Robe River products have relatively high levels of these impurities and are being discounted as a result, Citi says.

Thermal coal won’t maintain its pricing high

A similar story is being played out in the market for thermal coals, amongst which prices for high-energy coal are booming. Credit Suisse notes Newcastle 6000kc coal is the price leader, having touched US$120 per tonne, and its premium to high-ash 5500kc coal at Newcastle has widened to an unprecedented 70%.

The two coal grades have different markets – high-ash coal is sold to China and reflects China spot prices whereas high-energy coal is sold to Japan, Korea and Taiwan, particularly Japan. Japanese power stations are designed to run on higher energy coals so they can't readily switch to cheaper, lower energy coal.

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