Posted on 29 Jan 2020
The knock-on impact of the coronavirus outbreak is likely to bring down prices for steel and possibly scrap, following a sharp price drop in iron ore Tuesday.
A temporary fall in Chinese steel production and demand due to the outbreak and related restrictions could lead to higher steel production elsewhere and a build-up of inventories that may weigh down global steel prices, according to analysts at brokerage firm Jefferies.
S&P Global Platts research also leads to the expectation steel prices might fall, following Tuesday's 8% drop in the iron ore price.
"The concentration of the virus in China, the strong growth of Chinese steel production/exports since 2003 are likely create a demand vacuum across the region," Jefferies' Australia-based analysts Simon Thackray and Abraham Akra said in a note. "We believe, inventories of steel globally are likely to rise and offset the fall in Chinese steel production, weighing on global steel prices. Similarly, nonferrous scrap demand is likely to fall."
Thrackray and Akra said that the SARS virus outbreak in 2003 is an incorrect benchmark with which to assess the impact of coronavirus on steel markets due to the massive growth in Chinese steel production and exports since 2003.
"The coronavirus outbreak period is likely to weigh on steel price outputs and inputs. This is likely to extend to metal scrap, with China being a large consumer of nonferrous scrap metals on global export market," the analysts said.
Steel prices are likely to fall at a greater rate than those of iron ore, with steel production temporary reduced in the Chinese cities affected, they said.
China is the world's biggest steelmaker, producing 996.3 million mt of crude steel in 2019, up 8.3% on 2018 and accounting for 53.3% of global output, a growing share, the World Steel Association reported Monday.
It is also the world's biggest iron ore consumer, taking more than half of seaborne supplies. S&P Global Platts assessed the key 62% Fe Iron Ore Index at $84.70/dry mt CFR North China Tuesday, down 8% from the previous market assessment last Friday, on concerns over the virus' impact.
As from Tuesday, ports in Hebei province, a major Chinese steelmaking hub, have been closed, hampering both iron ore imports and steel exports, and many cities have delayed a restart of construction until further notice.
"It is a measurement to reduce infection risk, but also has negative impact to steel demand," a Chinese trader said.
With the government's extension of the Chinese New Year holidays, steel traders in Shanghai are on holiday until February 9 and domestic steel inventories are expected to increase, hitting downstream consumption.
"The price of iron ore has fallen in overseas markets... the same [is likely] for steel products I think," a mill source in northern China said.
Still, S&P Global Platts assessed SS400 HRC 3 mm thick at $496/mt CFR Southeast Asia Tuesday, unchanged from Friday, when it was last assessed. Separately, Platts assessed SAE1006 HRC at $515/mt CFR Southeast Asia, unchanged over the same period.
Some major mills in north China, including Hesteel Group, Anshan I&S and Shougang Group have been heard to be planning blast furnace maintenance in February. A South Korean mill source said production cuts may help Chinese mills maintain steel prices.
BMO Capital Markets on Tuesday forecast growth of around 1.5% in global steel consumption this year, in line with its global industrial production estimate, shared equally between China and ex-China. Last year, when iron ore supply was very tight, scrap was the crucial swing factor supporting higher steel production in China, BMO said in a report.
"The key upside risk to this (gain in global steel consumption) would be another year of Chinese construction surprising on the upside, while a halt to the global trade recovery on the back of coronavirus fears is the key downside risk," analysts led by Colin Hamilton said.
Source:S&P Global Platts
