FOCUS: China virus sell-off a sign of ‘worse to come’ for steel markets

The sell-off of Chinese steel futures this morning is a sign that “worse is to come” for global steel prices, market sources told Fastmarkets on Monday February 3.

Expectations of a rosy second quarter fueled by seasonal demand have crashed on the pandemic, which broke out on the first day of the Lunar New Year holidays in China.

“With the current situation, the world can forget about steel prices increasing anytime soon,” a Chinese trader in Singapore told Fastmarkets.

“Steel futures prices have already hit the stop-loss limit this morning when the Chinese market resumed and domestic physical prices will follow,” he said.

The Wuhan coronavirus outbreak has caused more than 17,000 infections and 361 deaths in China so far and is expected to continue battering global steel market sentiment for the foreseeable future.

Force majeure certificates
Other market participants have not ruled out the possibility of steel mills declaring force majeure if they cannot deliver on their contracts, especially if prices are on a downward trend.

“We will have to wait for the mills to inform us if there will be any delivery delays before deciding if we will apply for a force majeure certificate,” a trader in northern China said.

The China Council for the Promotion of International Trade said on January 30 that businesses affected by the coronavirus outbreak can apply for the certificate.

“It’s likely that steel mills in China may make use of the force majeure certificate, especially with domestic steel prices falling, so they won’t have to sell at lower prices,” an industry source in Singapore told Fastmarkets.

A steel mill in Shandong has already told its customers that it will reduce production, according to market sources.

“It is planning to cut total production by 25% and stop a bar production line and a wire rod production line,” a trader in China said, quoting an official announcement by the steel mill. It also asked its customers to adjust their procurement schedules accordingly.

The full scale of the impact on the Chinese steel market is starting to emerge as more information trickles out from market sources. Four major provinces – Shanxi, Shaanxi, Sichuan and Gansu – have officially declared a cut in production rates for their steel industries to ensure that transport and human movements after the Lunar New Year holidays are reduced to contain the spread of the virus.

This is expected to cut 55,000 tonnes per day of steel production.

Logistical delays
Logistics will prove to be a major concern for the domestic China steel industry.

“The main obstacle for employees returning to work and the delivery of goods is enhanced virus scanning by the authorities at land checkpoints, which could result in transportation bottlenecks in areas of high traffic density,” a trader in Shanghai said.

At least 24 provinces and regions in China have delayed the resumption of business activities by another seven days to the week starting February 9-10, including major cities such as Beijing, Tianjin, Anhui, Chongqing, Fujian and Guangdong, according to official notices.

“Market participants outside China who need material can just buy small amounts from their domestic markets or other sources to replace any temporary supply shortfall,” the trader in northern China said.

There were some offers for hot-rolled coil at 3,630-3,650 yuan ($523-526) per tonne on Monday, down 230 yuan per tonne from 3,860-3,880 yuan per tonne before the Lunar New Year.

But downstream buyers were not active and no real price negotiations due to the delayed resumption of business activities in key market Shanghai, according to a local trader.

“It will be hard to deliver cargoes anyway, because most logistics companies haven’t resumed operations,” he said.

A second Shanghai-based trader believed transaction prices will be lower if any deals are concluded in the near future because steel mills are worried about mounting inventory levels in the face of delayed consumption by end users.

Impact on Southeast Asia
The fallout from the coronavirus has also hit major steel producing and user countries in Southeast Asia, such as Indonesia and Vietnam.

In Indonesia, a major integrated steel mill was heard to have delayed the blow-in of its blast furnace, although this could not be verified with the mill by the time of publication. Another steel producer will quarantine employees returning from China for 14 days.

The PT Indonesia Morowali Industrial Park, where the steel mill is located, has barred 43,000 staff, including about 5,000 Chinese workers, from leaving or entering without written permission, according to media reports.

“The main issue is that Chinese employees who have not returned to Indonesia will no longer be able to enter the country and Chinese-owned companies could face a manpower crunch,” an industry source in Indonesia said.

The Indonesian government has enacted a ban from midnight today prohibiting all visitors from entering or transiting in Indonesia if they have been to China within the past 14 days.

A second industry source in Indonesia said steel demand outside China remains weak, so it is difficult to predict if any reduction of exports from China will have a major impact on prices.

Hot-rolled coil end-users in Vietnam, which typically has high exposure to Chinese imports, are considering imports from other sources in Asia, such as Taiwan, South Korea, India and Japan, if Chinese steel mills are not able to deliver on February-shipment contracts.

Vietnam has also restricted cross-border movements of people and agricultural products at its northern border with China, causing accumulated inventories on the Vietnamese side of the border, sources in Vietnam told Fastmarkets.

Bearish ferrous scrap
Even in the Asian scrap markets, which have little direct exposure to China, offers have started dropping from last week and traders expect more bad news in the coming weeks.

“I feel that the number of infected cases reported will continue to increase quickly and that whatever numbers the Chinese authorities are releasing may be lower than the actual situation,” an industry source in North America said.

“There are fears that cargoes transiting through East Asian [territories], such as Hong Kong or Taiwan, may also face logistical restrictions and cause delays in discharging at their ports of call,” the source said.

Vietnamese and Taiwanese buyers have both lowered their bids in the face of the virus outbreak and weak downstream demand.

Fastmarkets’ weekly price assessment for bulk cargoes of steel scrap HMS 1&2 (80:20), cfr Vietnam, was $278-285 per tonne cfr on Friday January 31, down $10-12 per tonne from $290-295 per tonne cfr Vietnam a week earlier.

Fastmarkets’ daily price assessment for containerized cargoes of steel scrap HMS 1&2 (80:20 mix), US material import, cfr main port Taiwan, was $242-245 per tonne cfr on Friday, narrowing downward by $5 per tonne from a day earlier. The assessment is down by $7-10 per tonne week on week.