In case there isn’t already enough evidence that 2020 is shaping up as a very odd year in commodity markets, it’s possible that the price of iron ore may soon exceed that of coking coal.

The price of a tonne of iron ore and coking coal, on a cost and freight delivered basis to China, reached near parity on Tuesday, according to data from S&P Global Platts.

Benchmark 62% iron ore was assessed by Platts at $118 a tonne, up $1.65 from the previous close, while coking coal was pegged at $118.50, unchanged from the prior close.

This meant the parity in prices between the two main ingredients needed to make steel was 99.6%, compared to iron ore being on average 57% of the coking coal price for the past 10 years, according to Platts.

Since the establishment of a viable spot market for iron ore around 2008 and the setting up of coking coal futures on the Singapore Exchange in 2014, the price of 62% iron ore has never risen above that of coking coal.

The surge to near parity this year is a reflection of the emerging dynamic in global commodity markets, namely that commodities with the most exposure to China’s apparent V-shaped recovery from the novel coronavirus are significantly outperforming those without.

China imports the bulk of the iron ore needed to feed its massive steel industry, with locally mined product generally being of inferior quality and relatively uncompetitive against the huge low-cost mines of Australia and Brazil, the world’s top two exporters.

China’s iron ore imports were 546.91 million tonnes in the first half of 2020, up 9.6% from the same period in 2020, according to official data.

It’s likely that they remained strong in July, with Refinitiv vessel-tracking and port data estimating imports of 101.6 million tonnes, although this figure may not exactly align with official data, given differences in when cargoes are assessed as having cleared customs.

CHINA STEEL STRENGTH

The strength in iron ore imports has been matched by China’s steel output, which hit a record high on a daily basis in June of 3.05 million tonnes per day, for a month total of 91.58 million tonnes, up 4.5% from the year earlier month.

For the first half, China’s steel output rose 1.4% to 499 million tonnes.

That amount of steel would require about 384 million tonnes of coking coal to produce, working on the industry standard of 770 kg of coking coal per tonne of steel.

However, China’s coking coal imports for the first half were only 38.1 million tonnes, according to Platts.

This means that imports meet roughly about 10% of China’s coking coal needs, with domestic output providing the rest.

In contrast, imports meet around 70% of China’s iron ore demand, and in turn China buys more than two-thirds of global seaborne iron ore volumes.

What this means is that global iron ore is far more exposed to China than is coking coal.

The dynamic at work is that iron ore is benefiting from its exposure to China, with the spot price on Tuesday’s close up 48% from the low so far this year of $79.60 a tonne on March 23.

Coking coal has moved the other way, with Singapore futures , which are based on the free-on-board Australia price, falling 32% from their year-to-date peak of $161.99 a tonne to Tuesday’s close of $110.50.

Coking coal is more exposed to the rest of the world’s steel industry, and here the news has been far worse than China’s recovery story, with other major steel producers such as Japan and South Korea battling to restart their economies amid the ongoing coronavirus pandemic.

World steel output dropped to 148.3 million tonnes in June, down 7% from the same month in 2019, while production in the first half was 873.1 million tonnes, down 6% year-on-year.

While it’s possible that a recovery in steel output ex-China will drive up demand and prices for coking coal, it’s also the case that this would also boost demand for seaborne iron ore.

This means it may be some time before coking coal re-asserts its traditional dominance over iron ore.