The price of iron ore traded in the spot market fell for a second consecutive session on Tuesday, dropping 3 per cent to $US143.40 a tonne according to S&P Global Platts. Prices have fallen over 10 per cent since the start of this month. The April futures contract traded in Singapore edged 0.4 per cent lower on Wednesday to $US145 a tonne.
Outbreaks of the coronavirus have spread to 28 provinces across China, with the country’s key steelmaking hub, Tangshan city, announcing emergency controls this week after a rise in cases.
While domestic steel demand has been hit harder than production so far, S&P Global Platts said that prices of the material have remained stable as the market anticipates a strong recovery in construction and manufacturing activities in April, when infections are expected to stabilise.
“The mills affected by lockdown have brought forward maintenance they planned for the next few months to mitigate the longer-term implications, hoping that if lockdowns are short, they can power ahead with the recovery in steel production,” said Daniel Hynes, senior commodity strategist at ANZ.
“The market is getting a bit nervous about the short-term impact of lockdowns, but I think these restrictions will garner more determination by authorities to stimulate economic growth when looking at further policy support.”
China’s zero-COVID-19 strategy contributed to its crude steel production falling 10 per cent year-on-year in February to an estimated 75 million tonnes, according to data released by the World Steel Association on Tuesday.
This caused global output to decrease for the second straight month to 142.7 million tonnes, down 5.7 per cent compared to a year earlier.
There’s evidence that this weakness has continued into March, with market sources in eastern Shanghai and southern Guangdong province telling S&P Global Platts that their steel sales are currently only about 50 or 60 per cent of levels in the same period last year.
“This was because many construction sites had been forced to suspend work due to restrictions on gatherings, while production by manufacturers had also slowed due to personnel quarantining or restrictions on transporting raw materials,” it said in published research.
Soft end-user demand has also caused construction steel inventories in Beijing to increase. In the same period last year, inventories were tracking at a weekly decline of 7 to 9 per cent due to strong seasonal demand.
Macquarie’s commodity strategy team said on Wednesday that “suppressed steel mill margins and COVID related logistic disruptions could constrain near-term iron ore prices, in addition to government intervention”.
Some mills in eastern China said steel mills across the country have already developed plans to keep output running as normal throughout COVID-19 restrictions, according to S&P Global Platts.
Meanwhile, strategists argue the threat of slowing economic growth caused by China’s zero tolerance strategy could prove to be a blessing in disguise due to the potential for a ramp-up in stimulus to correct slower growth.
“In a strange way, this could bolster sentiment for the rest of the year,” Mr Hynes said. “The government has previously tackled similar issues with increased infrastructure spending, and the backdrop for iron ore remains relatively positive.”
Mr Hynes also noted that China’s current approach of locking down specific regions is different to the sweeping restrictions used when the pandemic initially hit.
“I’m not too concerned about the longer-term effect on iron ore because China is taking a more focused approach this time,” he said.
