If you think back to President Trump’s 2016 election he was going to do something for the steel industry. He imposed a tariff on China and some things were changed a bit, then US Steel companies invested a great deal of money to upgrade their properties which meant steel prices fell and finally we had COVID. Many things slowed down, although the President has promised an infrastructure bill to help build up roads and bridges which need steel. To make steel, the main ingredients are iron ore, coking coal and water. The biggest producer of steel in the world is still China.

In an article by Clyde Russell of Reuters, the price of a tonne of iron ore and coking coal have almost reach parity according to data from S&P Global Platts.

Iron ore was $118 a tonne, while coking coal was $118.50 a tonne, the reason this is different is for the past 10 years iron ore has been 57% of the cost of coking coal. Since the establishment of a viable spot market for iron ore around 2008 and setting up coking coal futures on the Singapore Exchange in 2014, the price of 62% iron ore has never risen above coking coal.

The reason for the change is the demand in China. China imports the bulk of the iron ore needed from Australia and Brazil. China imported 546.91 million tonnes in the first half of 2020, up 9.6% from the same period in 2020.

China steel output hit a record high in June with 3.05 million tonnes a day or a monthly total of 91.58 million tonnes up 4.5% from the year earlier. That amount of steel requires 384 million tonnes of coking coal to produce working on the industry standard of 770 kilograms of coking coal per tonne of steel.

China imported 38.1 million tonnes or imports were meeting 10% of China’s coking coal needs or domestic output provided the rest. In contrast, China imports 70% of the iron ore needed or buys 2/3s of global seaborne iron ore volumes.

Linking to dividend paying stocks, in the Rocky Mountains there are tonnes of coal found and exported. Millions of tonnes used to be sent to electrical utilities to make electricity, to steel mills domestic and internationally. Utilities are generating more electricity by solar and wind (about 14% of needs), natural gas is cheaper than coal, and the demands for coal in China has fallen. Sometimes a great asset is no longer the first choice as alternatives come forward. The change was slow and then it seemed to accelerate. No one did anything wrong, but change happens. Always look at alternatives, what are they and how do they affect your investments?

There are more questions than answers, till the next time – to raising questions.