Rebalancing of the ferrous metals value chain: coking coal nearing a short-term peak, steel margins expected to recover in 2H26

Overview

This report focuses on China's steel and ferrous metals value chain. Its core view is that coking coal supply remains tight under safety inspection constraints, but prices are approaching a short-term resistance level; steel mills have fallen into losses due to higher coal prices and lower steel prices, after which maintenance, coke price cuts, and lower iron ore costs will redistribute profits across the value chain, with steel margins expected to recover gradually in 2H26.

Core views

UBS believes the marginal pressure from tight coking coal supply will ease from an approximately 7% year-on-year decline in July-August to around 3% in September-November; steel mill margins will be pressured during the July-August off-season, but peak-season demand in September-October and a return to positive year-on-year export growth will support steel prices; two to three rounds of coke price cuts will help most steel mills return to breakeven or slight profitability; iron ore remains a key swing factor, and further price declines could continue to improve steel mill profitability.

Analysis framework

The report uses a value-chain profit rebalancing framework, analyzing coking coal supply shocks, steel mill spreads and operating margins, coke price transmission, and iron ore inventories and cost curves in sequence, while assessing the path to earnings recovery in 2H26 based on steel mill maintenance, peak-season demand, and changes in exports. The valuation section discloses that P/BV-ROE is used to set target prices for covered steel companies.

Methodology notes

• Industry supply-demand and profit-chain analysisFerrous metals value-chain rebalancing

  Redistribution of profits from raw materials and coke to steel mills within the value chain

  When higher coking coal prices compress steel mill margins, steel mill maintenance reduces raw material demand, while lower coke prices and declining iron ore prices ease costs, ultimately driving steel mill margins from losses toward breakeven or slight profitability.

• Valuation methodologyP/BV-ROE

  Setting target prices based on the relationship between price-to-book value and return on equity

  The report discloses that the P/BV-ROE method is used to set target prices for covered Chinese steel companies, but this excerpt does not provide specific company target prices.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China steel sector

  Directly benefits from profits flowing back to steel mills across the value chain

  Strengths

  Coke price cuts, lower iron ore prices, and improving peak-season demand are expected to drive margin recovery.

  Weaknesses

  Steel prices are currently weak, and nationwide steel mill margins have turned negative.

  Comparison

  Compared with the coking segment, steel mills are more likely to benefit from coke price cuts; compared with coking coal, a recovery in steel demand will take time.

  Risks

  Weaker-than-expected property and infrastructure demand, a rebound in raw material prices, and changes in environmental and capacity policies.

• Coking coal

  Key upstream cost item for steel

  Strengths

  Strict safety inspections in Shanxi continue to keep short-term supply relatively tight.

  Weaknesses

  Prices are approaching the Rmb2,000/t resistance level, while steel mill maintenance will weaken marginal demand.

  Comparison

  Compared with iron ore, it is more affected by domestic safety inspections, with a more pronounced short-term supply shock.

  Risks

  Faster-than-expected mine restarts, expanded steel mill production cuts, and coke price cuts weighing on coal prices.

• Coke

  Intermediate link in steel mill cost transmission

  Strengths

  Previous consecutive price increases improved reported margins, while chemical by-product income partially offset higher coal prices.

  Weaknesses

  Weak pricing power limits the margin ceiling, and the industry may return to breakeven or losses after price cuts.

  Comparison

  Compared with steel mills, it has weaker bargaining power, making margins more vulnerable to compression after steel mill production cuts.

  Risks

  Rising coke inventories, pressure from steel mills to cut prices, and difficulty reducing costs while coal prices remain high.

• Iron ore

  Key swing factor in steel costs

  Strengths

  Lower prices can significantly ease steel mill costs; the May-June decline has already reduced costs by approximately Rmb80/t.

  Weaknesses

  In the short term, prices are supported by stronger freight rates and trade restrictions, so they may not decline linearly.

  Comparison

  The report considers iron ore the most important swing factor when both steel mill and coking plant margins are thin.

  Risks

  Changes in port inventories, the pace of Simandou's ramp-up, negotiations between CMRG and miners, freight rates, and supply disruptions.

Key data

• Coking coal price increase+26%, approximately +Rmb410/tFrom the Qinyuan accident on May 22, 2026, to the June 29 peak.
• Coking coal price peakRmb1,995/tReached on June 29, then declined to approximately Rmb1,960/t.
• Coal mines suspended in Shanxi73 mines, 75mtpa raw coal capacityStill suspended as of July 15; two mines in Qinyuan with combined capacity of 2.1mtpa had resumed production.
• Steel spread changesRebar - Rmb160/t; hot-rolled coil - Rmb150/tThe narrowed spreads correspond to losses of approximately Rmb10-40/t.
• Proportion of profitable steel mills40%Based on Mysteel data, down from 63% to 40%.
• Expected daily hot metal productionDeclining from 2.43mt/d to 2.35-2.37mt/dExpected to recover in September.
• Coke price increases and cutsSix previous price increases totaling +Rmb320/t; approximately three expected price cuts totaling around Rmb150/tThe first Rmb50/t price cut is expected to begin.
• Iron ore price changeDown 8% in May-June, approximately US$7/tReduced steelmaking costs by approximately Rmb80/t.
• Iron ore port inventoriesApproximately 170mtFigure 10 in the report indicates that inventories are at a high level.
• Year-end iron ore outlookUS$90-95/tThe global mining team expects prices to decline toward the cost curve by the end of 2026.

Impact & implications

For steel equities, higher coal prices in 2Q26 could pressure the earnings of Baosteel, Maanshan, and Angang, but if coke and iron ore prices continue to decline and peak-season demand recovers, margins have room to recover in 2H26. For the coking and coking coal segments, steel mill maintenance and coke price cuts will limit further pricing power, and coking profits may return to around breakeven.

Risks

• Steel prices continue to weaken during the July-August off-season, delaying margin recovery.
• The pace of Shanxi safety inspections or coal mine restarts deviates from expectations, causing volatility in coking coal supply, demand, and prices.
• A rebound in iron ore prices limits the upside for coal prices and compresses steel mill margins.
• Property sales, new starts, and fixed asset investment are weaker than expected.
• Infrastructure investment growth falls short of expectations.
• Environmental, capacity-regulation, or SOE reform policies create supply and valuation disruptions.
• Significant volatility in raw material prices, including iron ore and coking coal.

What to watch

• Whether coking coal prices remain capped near Rmb2,000/t.
• The restart progress of suspended Shanxi coal mines and the year-on-year decline in coking coal output from July to November.
• Whether daily hot metal production can recover from the low of 2.35-2.37mt/d in September.
• Whether the proportion of profitable steel mills according to Mysteel can recover from 40%.
• Whether coke price cuts reach two to three rounds and whether coking margins fall back to breakeven.
• Changes in iron ore port inventories, freight rates, and supply from major miners.
• Whether peak-season steel prices and year-on-year export growth in September-October can continue.