Posted on 21 Feb 2020
Japan's slowing economy has steelmakers worried as the country's manufacturing sector sees more pressure from the impact of the COVID-19 outbreak.
Latest data released by Japan's Cabinet Office on February 17 showed the country's gross domestic product shrank by an annualized 6.3% over the last quarter of 2019, its first fall in five quarters.
Another fall in the first quarter of 2020 would push the country into a technical recession - two consecutive quarters of growth contraction - with its February purchasing managers' index expected to come in at 47.6, lower than 48.8 in January and its steepest fall since December 2012, the au Jibun Bank Japan Manufacturing PMI showed.
"Japan's construction demand has slowed after completion of Olympic infrastructure," a Japanese trader said.
"(Steel) Exports too for the country is weaker. We just have to wait and see how this virus issue plays out, it's just adding another downward pressure for mills."
In addition to construction steel demand, Japanese carmakers are also likely to lower their requirements of steel.
A prolonged Lunar New Year holiday shutdown in China resulted in a shortage of auto parts for carmakers.
Nissan Motor had said the shortage of auto parts from China had caused it to partially stop production at its Kyushu plant in Fukuoka prefecture on February 14 and February 17.
The shortage situation may be exacerbated as, on Thursday, Hubei, the epicenter of the coronavirus outbreak, asked companies not to resume work until March 11 from February 21.
The Japanese government plans to set up a task force to deal with the impact of Covid-19 on the country's automotive sector, its Ministry of Economy, Trade and Industry said.
"That's also why you don't see scrap prices within Japan improving, even though regional buyers are snapping up Japanese scrap or even when Turkish scrap prices are seeing up," a trader there said.
As Japan grapples with economy uncertainty, in a year when the Tokyo Olympics is scheduled to take place, steel mills and traders alike have shared concerns on raw material demand and supply.
Some iron ore market sources were heard to be expecting possible reselling of the raw material to take place by mills if poor downstream steel demand continued to drag on. However, others noted that there would be higher possibility of forward term contract volume renegotiations instead.
"Possible offers for Japanese mills into China might surface again. We have seen this happening just last year too, when steel production was cut," a north Asian trader said. "This led to end-users offering Australian iron ore cargoes into China. And this time round, there may be excess supply."
Prompt scrap generation from factories also built concerns in traders' minds, as generation for prime grades like Shindachi and Busheling material could be hit if the manufacturing slowdown continued.
Albeit the bearish air on Japan's manufacturing outlook, the weakness in scrap demand currently however cannot be fully attributed to the virus outbreak, Platts noted.
Scrap prices within Japan have already been reduced to three year lows entering into 2020, on most part due to the weaker steel demand in the country, and for its steel exports, Platts reported previously.
This year saw Tokyo's major electric arc furnace, or EAF, slash scrap prices total of seven times within just a month and a half, cutting by a total of Yen 4,500-5,000/mt ($40-$45/mt) across all grades.
Japan, Asia's largest exporter of scrap, saw a total export volume of 7.66 million mt in 2019, with major buyers in South Korea, Vietnam, Taiwan, and Bangladesh, accounting for 92% of the total exports.
Its prime grade scrap was primarily consumed by specialty steel makers, or induction furnaces within the region.
The country is also the second largest iron ore importer in Asia, after China, with the country importing 119.57 million mt in 2019, though posting a 3.5% decline year on year, with largest sources from Australia and Brazil accounting for 84% of total imports.
Being the world's third largest crude steel production, Japan's performance fell below the 100 million mt mark in 2019, at 99.3 million mt, down by 4.8% from a year ago, figures from the world steel association showed.
Source:S&P Global Platts
