A 6% decline in the daily average 62% Fe iron ore fines benchmark last week contributed to the lowest quarterly price rise for the first quarter in five years, in spite of clear evidence of supply-side constraints. Although there were clear demand-related obstacles to iron ore suppliers raking in more typical, seasonal price rises in the period, we view the 1.1% price rise – to $89.92 per tonne cfr China – as a relatively weak performance and one that now threatens our pre-Covid-19 outlook of $79 per tonne for this year.
It has certainly been unsatisfactory to local Chinese miners who last year recorded the biggest profit gains of any major part of China’s industrial complex. In the first two months of this year, data just published reveals that iron ore mining profits fell by more than 80% year on year; the worst performing industry. It will only be small consolation to steelmakers downstream that their minuscule profits have actually fallen by less than China’s industrial average.
Outside of China, steelmakers appear under much more demand-related pressure. We estimate that the decline in non-Chinese steel demand we observed last year – the first in five years – actually accelerated at the start of this year, even before the impact of Covid-19 was felt. A trusted way to observe the fundamental malaise right now is through our latest scrap price assessments, which are the most directly affected by steel production cuts. This week, we highlight the acute downturns across key Asian markets in just the past seven days. Only automotive-related prime scrap prices are holding up, given the dearth in new production.
For prime as for any raw materials today, sharp price cuts seem only avoidable through significant supply constraints, and this seems a particular concern to alternative metallics industries, where some of the key merchant buyers in the world – such as Italy – are under extreme lockdown conditions. But key suppliers, so far, seem relatively unscathed.
Yet if demand were to outperform business plans and expectations, the pricing outlook could once again dramatically change. Judging by key sentiment indicators in China, such as the manufacturing and perhaps even more relevant non-manufacturing purchasing managers’ indices (PMIs) – given the latter focus on construction – the February downturn is looking like a “blip.” We have revised our second-quarter demand outlook downward across the world, but to the extent that we are underestimating the seasonal strength to come, so we are underestimating the price outlook.