Input costs will stay high with steel makers continuing to hold product spreads low, despite a substantial decrease in the prices of metallurgical coal or coking coal, primarily because the prices of iron ore, the major steelmaking material, are expected to remain high in the next 12 months.
Rising coronavirus infections in the leading iron ore producer Brazil signal potential supply disruptions that will drive up prices. Iron ore is now priced at three times the amount since the last decline in January 2016, Moody's Investors Service said in a report.
"The price of metallurgical coal, the other primary raw material, is declining due to poor demand for steel. However, product spreads would stay narrow and profitability low due to the price of soft steel selling and the high price of iron ore," the report said.
Although the prices of iron ore are at a four-year peak, the price of coal met has fallen from its height in 2018. They rose briefly in the first quarter of 2020 on the back of China's steel demand, but have subsequently decreased due to a substantial fall in steel demand.
Steel manufacturers throughout Asia-Pacific and Europe have decreased their production by idling furnaces and reduction in utilization levels, contributing to a decrease in the price of met coal. Like iron ore, just around 20-25 per cent of the seaborne met coal goes to China.
"Met coal is therefore more exposed to ex-China steel production. Meanwhile, the surge in supply from Australian met-coal producers, whose operations have recovered from weather events at a time when demand is dizzying, has driven price declines," the report said.
Compared to the average price of $169 per ton in 2019, met coal prices fell to $148 in the first quarter of 2020 and averaged $112 at the end of the second quarter.
Nevertheless, lower met coal prices would have a subdued effect on product spreads as, despite the downturn, the met coal prices are still 36 per cent higher than in January 2016 and the prices of iron ore, the key component in steel production, are also high.
In addition, steel sales prices are currently low due to a drop in demand from lower economic activity. Another reason for the subdued impact of low coal prices on steel is the weak sales mix that is curved towards semi-finished products with lower prices than premium products for the automotive and manufacturing industries.