FOCUS: Wuhan virus likely to dent Q2 demand for steel, iron ore in Asia

Sentiment in the seaborne iron ore and Asian steel markets have deteriorated amid a rapid spread of the 2019-nCoV - or Wuhan novel coronavirus - in China, which appears to have intensified in the last week.

Market participants are anticipating a delayed restart of construction and manufacturing activity after the country’s Lunar New Year holiday, which has been extended until at least Sunday February 2.

This has dampened their outlook for steel and iron ore demand.

The Chinese government has imposed travel restrictions across large swathes of the country with high numbers of infections. Multiple cities in Hubei province – where Wuhan city is located – are under lockdown. This is expected to affect the movements of about 56 million people.

Market participants expect the fallout from the virus to have an effect on steel markets for the foreseeable future.

“Its logical assumption that sentiment in the steel markets will falter due to the virus. However, while demand will fall, production will also be affected,” the managing director of a trading firm said.

“It’s clear that the much-talked-about seasonal demand in the second quarter may not materialize that quickly. It’s likely that prices will fall – the question is, by how much?” he continued.

There are widespread expectations that workers and traders in the Chinese steel industry will not return to work from their home towns as quickly as they usually do due to the travel restrictions in China.

Furthermore, in addition to the extension of the January 24-30 national holiday until February 3, local authorities in Shanghai and Suzhou have asked companies to extend their employees’ holiday until February 9.

Traders in Asia who had entered into long trading positions in the spot market on expectations of a surge in seasonal demand in the second quarter have started to second-guess their strategy. They are hoping for more clarity to emerge from China’s steel market.

Steel prices in Southeast Asia are widely expected to fall, according to a trader in Singapore.

“Demand will surely fall, and prices are expected to follow, although at this point of time it’s still unclear how prices will move when China returns from the Lunar New Year holiday,” he said.

The spread of the virus is also likely to result in a shift in market fundamentals, according to a major flat steel trader in East Asia.

“The outbreak of the coronavirus can cause extreme changes to the steel markets. Previously, prior to the emergence of the virus, there wasn’t any sign of prices dropping because South Korean and Japanese steel mills had fewer HRC cargoes allocated for export,” he said.

A Taiwanese trader said the coronavirus was also likely to spread further in Asia, with new cases being reported every day.

“Steel demand is likely to fall, and prices will likely adjust downward further. There was some interest from Europe for Asian steel even during the Lunar New Year, but this demand has since disappeared because buyers are cautious about price trends,” the trader said.

A source at a major Japanese steel mill said Asian buyers were taking a wait-and-see approach. He said there had not been any immediate impact on the mill’s business yet.

Iron ore
With China accounting for around 70-80% of global seaborne iron ore trades, the outbreak of the coronavirus and its impact on downstream sectors in the country are bound to weigh on prices for the steelmaking raw material, according to market sources.

This bearish sentiment was reflected in the derivatives market on Tuesday, when the Singapore Exchange’s (SGX’s) February 62% Fe iron ore swaps fell by about 10% on the week to around $82-83 per tonne.

The impact on the physical market is yet to be felt due to the absence of Chinese market participants celebrating the Chinese New Year.

Weak demand for steel products is expected to result in a build-up of steel inventories at mills, which would put pressure on their margins.

“The distribution of steel products will also be a challenge. For example, recently curbs were implemented on the movement of trucks in and out of Tangshan’s ports and that will affect the domestic movement of iron ore and steel products,” a buyer source in China said.

“Some mills may also decide to reduce steel production altogether, since a manpower shortage coupled with transportation restrictions affect their ability to sell their products downstream and bring raw materials to their plants,” he added.

It is unclear if lower steel production will offset the expected flaccid demand for steel products.

But any pressure on steel prices will likely affect Chinese mills’ margins. When this happens, these steelmakers often respond by increasing their consumption of lower-grade iron ore.

The price spread between high- and low-grade iron ore had been widening in recent weeks amid tighter supply of top-tier products from Brazil due to heavy rainfall coupled with sustained demand for such materials among Chinese mills keen to hold on to whatever profits they can in the face of steelmaking restrictions to lower emissions.

On Wednesday, the SGX’s 62% Fe iron ore swaps rebounded from a sharp drop a day earlier after word emerged that rail services connecting iron ore mines in Brazil to the country’s ports may have been interrupted by persistently heavy rain. Fastmarkets could not confirm these disruptions with relevant Brazilian authorities at the time of writing.

These supply concerns are all too familiar, with memories of a tailings dam collapse in the Latin American country last year still fresh in the minds of many market participants. The suspension of mining operations that followed the collapse had affected some 93 million tonnes of Vale’s iron ore output.

Disruptions to Australian supply due to adverse weather at the end of the first quarter of 2019 further augmented the impact of the Brazilian supply cuts, pushing seaborne prices to five-year highs by July.

While Australian shipments have experienced a strong recovery since then, some 40 million tonnes of Vale’s supply remains suspended.

Of these, 15 million tonnes are expected to return this year but they remain subject to the miner’s safety-first approach and any regulatory or judicial requirements that could affect mining operations.

“The impact of the disruptions in Brazil, including the recent one on railway operations, will be a less significant factor for the iron ore market compared with the health of Chinese demand in the aftermath of the virus outbreak,” a second Singapore-based trader said.

“We expect iron ore demand to pick up strongly in the second quarter following lackluster buying in the first quarter due to the slowdown,” he added.

A third trader in Singapore highlighted the significance of port stocks in China as a cushion against any seaborne supply disruptions.

“Both the factors – tight supply and weak downstream demand – will affect iron ore but the supply-side impact may be mitigated to an extent by the iron ore stock at Chinese ports,” she added.