WSJ Report on Coking Coal Coking coal has been left out in the cold as prices of iron ore—the other key ingredient in making steel—have caught fire.
Coking coal, also known as metallurgical coal, provides the heat that melts iron ore and other materials to be blended into steel. Prices of the coal variety and iron ore usually move in tandem, affected by increases in steel production or worries about economic growth. But lately they have diverged: Iron-ore prices have risen about 70% from September's lows, while coking coal has climbed only 7% over that span.
The failure of coking coal to keep pace with its steelmaking counterpart stems from concern about supplies or iron ore.
"The main reason we have seen a rally in the iron-ore price is the lack of Indian ore," UBS UBSN.VX +0.33% analyst Tom Price said.
India, the third-largest iron-ore exporter after Australia and Brazil, has cracked down on illegal and "excessive" mining. Court-imposed production and export bans in India's iron-ore-producing regions have reduced the amount of material available in the international market considerably. The Federation of Indian Mineral Industries has forecast iron-ore shipments will fall by more than half in the year ending March 31 due to the recent restrictions.
But with coal, "you haven't had any supply-side shocks and that's why you have iron ore racing higher and met coal just sitting there," Mr. Price said.
Supplies from Australia, the world's largest exporter of coking coal, have been increasing. In November, Australia shipped 13.5 million tons, up 12% from a year earlier, marking the biggest monthly delivery for 2012, thanks to relatively dry weather and new agreements with labor unions in the coal-rich state of Queensland. Production was disrupted earlier in 2012, mainly in the first half of the year, by floods and frequent industrial action.
"This is expected to cap [coking coal] prices, which should continue to lag iron ore," said Nomura analyst David Radclyffe.
Iron ore traded at $145.10 a metric ton Friday, up 3.7% for the week after hitting a 15-month high on Jan. 8, while coking coal rose 2.8% for the week to $168 a ton. Chinese hot-rolled steel coil, the benchmark for steel, traded at $580 a ton, up 2% for the week, according to the Steel Index, a data provider.
Other factors also are driving apart prices for ore and coal.
The iron-ore market is dominated by China, which consumes more than half of all the material traded by sea. The world's second-largest economy, however, is nearly self-sufficient in coking coal, so prices for the fuel are driven by other major consumers, namely Japan and South Korea.
Those customers prefer to lock in prices using longer-term contracts, rather than buying coking coal in the spot market, meaning that the market is less volatile than for iron ore. "There is never a rush back to the market that drives prices rapidly higher," UBS's Mr. Price said.
The lack of Chinese demand in the international market for coking coal means prices are also less likely to rise in response to renewed optimism over the nation's economic outlook.
Still, analysts are optimistic that coking-coal prices will rise in the coming months. Steelmaking is increasing, with high output in Asia offsetting declines in Europe and the U.S.
The market is also heading into a period when demand is usually strong, according to UBS. Steel production generally picks up from the end of the Chinese New Year holiday, which ends in mid February this year, through at least May.
Still, a surge for coking coal like the one iron ore recorded last year isn't likely, analysts say. Deutsche Bank DBK.XE +1.44% is forecasting coking-coal prices will tick higher over the first three quarters of 2013, peaking at US$190 a ton, before softening once again.
The bank expects iron-ore prices will average $140 a ton in the first quarter before dropping back, averaging just $110 a ton by the fourth quarter.