Iron Ore and Steel Margin Spreads

A steel mill buys iron ore and coking coal, processes them into steel, and sells the finished product. Its profitability doesn't track the price of steel alone, or the price of iron ore alone — it tracks the margin spread between the two: what it costs to buy the inputs needed to make one tonne of steel versus what that tonne of steel sells for. This spread compresses when input costs rise faster than steel prices, and widens when steel demand runs hot relative to raw material costs, functioning much like the crack spread does for oil refiners.

Worked example

Producing one tonne of steel requires roughly 1.6 tonnes of iron ore (at $110/tonne) and 0.5 tonnes of coking coal (at $220/tonne), for input costs of about $176 + $110 = $286/tonne of steel. If steel sells for $650/tonne, the margin spread is roughly $650 − $286 = $364/tonne before other costs. If iron ore then jumps to $160/tonne while steel prices stay flat, input costs rise to roughly $256 + $110 = $366/tonne, and the margin spread collapses to about $284/tonne — a real profitability hit even though steel itself never got cheaper.

Mills that can, respond by adjusting output rather than accepting a thinner margin — idling higher-cost furnaces when the spread turns unprofitable, and ramping back up once either raw material prices ease or steel prices catch up, which is part of why global steel production capacity utilization tracks the margin spread more closely than it tracks steel prices alone.