China's Commodity Crossroads: Iron Ore's Strategic Bet and Thermal Coal's Pricing Power

The Chinese commodity market is at a pivotal juncture, with steel production declines clashing against iron ore price stability, while coal's oversupply creates a stark contrast in investment opportunities. For investors, this environment demands a nuanced approach: a tactical long position in iron ore futures and a short in thermal coal to capitalize on diverging market dynamics.

The Iron Ore Paradox: Declining Demand, Stable Prices, and Strategic Opportunity

China's steel production fell to its lowest level since 2020 in the first half of 2025, with output dropping 3% year-on-year. This decline, driven by a real estate slump and extreme weather disruptions, would typically depress iron ore demand. However, Singapore-traded iron ore prices remain stubbornly stable around $98/ton—a midpoint unchanged since early 2025—despite a 3% drop in imports.

This price resilience signals a strategic undercurrent. While imports have declined, they remain anchored by global supply constraints and the expectation of a cyclical rebound in steel demand. The Simandou project in Guinea, set to begin shipments in late 2025, will add 10–15 million tons of high-grade ore annually but faces logistical hurdles. Meanwhile, China's steel exports surged 11% year-on-year in Q2 to 30.7 million tons, suggesting domestic producers are stockpiling low-cost iron ore to fuel exports amid weaker domestic demand.

Investors should view this stability as a buying opportunity. Even a modest recovery in China's construction sector—or a geopolitical disruption in Australian or Brazilian supplies—could send prices sharply higher. The current $98/ton level is near four-year lows, offering a favorable risk-reward for long positions in iron ore futures.

Thermal Coal's Oversupply: A Short Seller's Paradise

China's coal sector presents a stark contrast. Domestic thermal coal production hit record highs in the first five months of 2025, with output up 5% year-on-year to 5 billion tons. This surge, combined with weak power demand and renewable energy adoption, has created a structural oversupply.

Imports have collapsed, falling 11% year-on-year in H1 2025, as China prioritizes domestic coal. Ports now hold excess inventory, and prices for 5,500 kcal/kg coal have slumped to $92/ton—the lowest since 2021. Meanwhile, exports have risen 13%, further exacerbating global supply gluts.

The U.S.-China trade war has amplified this trend. While U.S. thermal coal exports to China are negligible (just 1.5 million tons in 2024), tariffs have forced buyers to diversify. Australia and Indonesia have filled the gap, but their abundance has kept prices depressed. Even if trade tensions ease, China's coal output growth outpaces consumption, ensuring downward price pressure for years.

Navigating the Trade-War Crosshairs

U.S. tariffs have reshaped commodity flows but not fundamentals. For iron ore, the focus is on China's export-driven steel sector and supply-side bottlenecks. For coal, the oversupply is structural, with renewables and policy shifts accelerating the decline in domestic reliance.

Investment Strategy:
- Long Iron Ore Futures: Position for a cyclical rebound in steel demand and Simandou's delayed impact.
- Short Thermal Coal Futures: Capitalize on China's coal glut and global oversupply, with prices unlikely to recover before 2027.

Conclusion

China's commodity markets are a study in contrasts. Iron ore's stability amid falling production hints at a strategic floor, while coal's oversupply underscores a secular decline. Investors who bet on these dynamics—long iron ore, short coal—will position themselves to profit from the interplay of policy, trade wars, and global supply chains.

The next catalyst? Watch for real estate reforms in China and the launch of Simandou shipments. For now, the path to profit is clear: buy iron ore, sell coal.