China’s Coronavirus Lockdown Points To Q1 Slump For Metals
The coronavirus outbreak has fueled plenty of fear and dramatic measures — including extending China’s Lunar New Year break to February 9 in some regions and February 13 in Hubei — but its emergence during the holiday period means seasonally slow demand in China may absorb much of its downside impact on metals markets — although it is already certain to result in a weaker-than-usual first quarter.
Steel mills keep blast furnaces operating during the holiday, but February is typically the weakest month for metals output in China. Trading in iron ore, coking coal and alumina slows or stops entirely as restocking mostly occurs in the run-up to the holiday.
Construction activity also winds down in January and February due to severe weather, particularly in northern China, and migrant workers returning to home towns for the holidays. The question this year is, how long will they remain there?
Business and construction activity is currently slated to restart February 10 in Beijing and Hunan, Zhejiang and Hebei provinces, but in cities in Shanxi, Tianjin and parts of Sichuan, a restart date has yet to be announced.
The other question is: How will workers return to their jobs? Long distance buses remain suspended in many provinces and there is plenty of disquiet about them potentially returning with the virus. And do workers want to return? S&P Global Platts has heard many examples of traders and construction workers sayingthey may only return mid-February — and only if the outbreak doesn’t get worse.
Restrictions on gatherings also appear likely to curtail manufacturing and construction activity. Chinese media has widely publicized the cases of a company in Zhejiang province that held a meeting of 30 people, 11 of whom later tested positive for the virus, and a gathering of six school friends, one of whom had the virus and infected the others. This has naturally engendered suspicion and prompted many people to remain indoors, which will likely have a negative impact on China’s economic growth in Q1.
STEEL RAW MATERIAL SHORTAGES LOOM
While iron ore, alumina, metallurgical coal and other commodities are currently unloading as normal, there are some restrictions on truck access at Tangshan and Tianjin ports in northern Hebei province.
Outbound trucking logistics have also been halted at Jingtang and Caofeidian ports.
Mills that transport materials by train should have no problems receiving orders, but most mills and aluminum smelters rely on trucks.
Some ports are only using one offloader, greatly reducing the discharge rate. As most ports have limited storage, this could cause bottlenecks if vessels are unable to discharge. In the case of iron ore, mills relying on trucks say they may face raw materials shortages by second-half February.
Platts has been told that Tangshan port capacity for metallurgical coal is close to capacity and under pressure following the discharge of another five to 10 vessels. Once this capacity limit is breached, China will likely lose the ability to import coking coal until trucking logistics resume.
Hubei province, a major manufacturing hub, is in lockdown. Other transport arteries are also impacted, and many truck drivers remain on holiday.
A ferrosilicon producer in Asia said one supplier had warned it may be unable to supply semi-coke as Shaanxi province – China’s key coal and coke region – had banned trucks from crossing the province. Inner Mongolia is also denying entry to trucks.
The producer said there was talk that Chinese ports had closed and “vessels don’t want to go to China now as they are worried the crew will be quarantined.”
However, Fortescue Metals Group on January 30 said it had not experienced any disruption to iron ore shipments to China.
POST-LNY RECOVERY MAY BE PUSHED TO Q2
Unsurprisingly, the outlook for metals in Q1 has turned negative and any recovery looks likely to be pushed to Q2. The yuan has also weakened considerably in the last week, reducing China’s buying power and raising the cost of its imports.
Three-month LME aluminum fell 5% week on week to $1,736/mt January 30, dragging down alumina market sentiment. “It is very scary; nobody knows what to expect next and no one wants to deliver to Asia now because of the virus; everyone wants to evaluate the situation first,” a Middle Eastern aluminum producer said. An aluminum trader in south China said he was supposed to restart work February 3 but doubted this would happen. He had earlier anticipated a strong start to the year but now expects exports of aluminum extrusions to be adversely impacted. An official at an aluminum smelter in east China expected the virus to result in weaker production and demand.
Platts 62% Fe iron ore fines fell to $83/mt January 30 from $95.85/mt CFR on January 20, while SGX swaps fell below $82/mt on January 31. Fortescue said sentiment was responsible for the price downturn rather than fundamentals. Q1 is typically low season for iron ore exports from Australia and Brazil due to heavy rain and cyclones, which should cushion some of the impact.
However, one international iron ore miner noted: “The international market is worried about iron ore demand in February and March and whether their iron ore vessels on the way to China will be discharged smoothly in the following weeks.”
The met coal market has been more bullish in anticipation of supply shortages. As well as potential problems importing coal, there is domestic tightness as China’s coal mines delay restarts.
Steel prices look set to fall in February as demand declines more quickly than production — although that could provide a buying opportunity with a view to the market returning to normal in March or April.
STEEL MILLS MAY HAVE TO CUT PRODUCTION
If downstream demand is weaker than expected – which seems likely – and mills are unable to source raw materials, will they cut production? Some market sources expect production cuts and additional maintenance work will be announced after February 9.
Chinese mills are generally reluctant to trim output, even when margins are slim, but current circumstances may force them to do so. Some steel mills in Shandong and Hebei provinces have already been heard voluntarily reducing steel production by up to 20% in February due to transportation restrictions and construction delays.
An end-user in Hebei said: “Our iron ore stockpile was planned to maintain production until February 8, but due to the difficulty of getting raw materials delivered to the mill, we are reducing our daily usage and considering production reductions.”
Another major mill in Anhui province and two in Shandong province plan to reduce production in February due to transport disruptions. Platts estimates a combined daily crude steel output loss of 70,000 mt/day from them.
At least five electric arc furnace steelmakers in Sichuan province will delay the restart of production to February 9 or later; their crude steel output loss is around 20,000 mt/day.
Property construction accounts for around 35% of steel consumption in China. Platts estimates that if property new starts rise by 4% on year in 2020 — down from 9% on year in 2019 — demand for long steel will continue, although this scenario could be under threat if the construction sector takes a big hit in Q1 due to a shortage of workers.
China’s struggling auto sector could be hurt further given that Wuhan in Hubei province is the country’s major auto production hub. China’s auto sector accounts for around 6% of the country’s total steel consumption, Platts estimates.
With workers staying home rather than out shopping for cars, white goods and appliances or looking at property, all these segments will feel the pinch if the outbreak is prolonged.
It seems unlikely that China will lift steel exports in coming months even if downstream demand is impacted. Inventories remain fairly low and some output could be trimmed. However, steel inventories will rise due to the extended holidays and uncertainty surrounding when construction activity will restart, resulting in an uncomfortable ride for metals markets through to the end of Q1.
Property construction accounts for around 35% of steel consumption in China. Platts estimates that if property new starts rise by 4% on year in 2020 — down from 9% on year in 2019 — demand for long steel will continue, although this scenario could be under threat if the construction sector takes a big hit in Q1 due to a shortage of workers.
China’s struggling auto sector could be hurt further given that Wuhan in Hubei province is the country’s major auto production hub. China’s auto sector accounts for around 6% of the country’s total steel consumption, Platts estimates.
With workers staying home rather than out shopping for cars, white goods and appliances or looking at property, all these segments will feel the pinch if the outbreak is prolonged.
It seems unlikely that China will lift steel exports in coming months even if downstream demand is impacted. Inventories remain fairly low and some output could be trimmed. However, steel inventories will rise due to the extended holidays and uncertainty surrounding when construction activity will restart, resulting in an uncomfortable ride for metals markets through to the end of Q1.
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