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Coronavirus Outbreak To Weigh On Global Steel Markets - John Anton, Amanda Eglinton, William May And David Smith, IHS Markit

Date 14/02/2020

An outbreak of a new coronavirus (2019-nCoV) in Wuhan, the capital of Hubei province in mainland China, and subsequent extension of factory closures beyond the Lunar New Year holiday have caused a downward revision to our iron ore and steel price forecasts over the first half of 2020. Mainland China produces more than half of the world’s steel and consumes more than 64% of global seaborne iron ore every year, making the steel market particularly vulnerable to changes in Chinese demand and production.

Hubei province, at the heart of the coronavirus outbreak, only accounts for around 2.5% of total Chinese finished steel production capacity. Hubei does, however, consume a significant volume of steel with its manufacturing and automotive industries. On net, we expect the cut to production to be less than the cut to demand. Thus, steel supply in mainland China will rise on balance, putting downward pressure on prices.

Impact on iron ore

The challenge steel mills will face is how to move iron ore from ports to the mills, given the disruption to transport and rail stemming from restrictions. This shortage of material inside mainland China will therefore boost port-side prices as mills scramble for ore. Furthermore, vessels will now begin to queue up at Chinese ports due to the lack of personnel in port handling services and the quarantine currently being applied to all inbound freighters while operatives provide a clean bill of health for the crew. We expect seaborne prices to temporarily ease as vendors look to divert vessels to other markets, e.g., North Asia and Europe. If Chinese mills are unable to get access to new iron ore feed, they will likely ramp down production, move to hot idling, or bring forward maintenance schedules, ceasing steel production all together.

Given that the worst-affected regions in mainland China  -- the provinces surrounding Hubei -- only constitute 11% of Chinese steel capacity, we estimate that total national steel production lost in first quarter 2020 will be around 12%, or (based on steel production growth of 3.5% in fiscal year 2020) around 31 million metric tons of crude steel.

Translated roughly into iron ore demand, this means a reduction in iron ore demand of 52 million metric tons, equivalent to around 55% of Chinese monthly iron ore imports. We estimate benchmark iron ore prices to fall $17 from pre-coronavirus levels to around $95/metric ton. We estimate that premiums for high-grade ore will expand and that discounts for low-grade ore will contract as mills rush to buy any ore available.

Impact on steel prices

The extended factory closures beyond the holiday week due to the coronavirus outbreak will reduce both demand for steel and production of steel.

Our forecast assumes that disruption to steel production due to factory closures and other logistical issues will last into March, and will be followed by a period of excess inventory hanging over the market through most of the second quarter. As a result, we anticipate more downside to prices in the coming months, with steel prices falling by $70–80/metric ton from their January peak through April/May, before rebounding over the second half of 2020 as demand rebounds once the coronavirus is contained.

Outside of mainland China, we also anticipate a pullback in global steel prices over the near term, primarily driven by falling scrap prices. Scrap prices increased by $70–80/metric ton across most global markets in the fourth quarter, after falling throughout most of 2019. Scrap prices increased too much, too fast and were exposed to a pullback. Lower scrap prices were expected to weigh on steel prices in the United States, Europe, and other major markets outside of mainland China in the coming weeks and months even before the coronavirus outbreak. The looming disruption to global demand and supply chains from the coronavirus outbreak, combined with lower Chinese steel prices, has also resulted in a downward revision to the second-quarter outlook for steel prices in the United States and Europe.