Iron ore, met coal miners prepare for falling steel demand outside China

London — Steel demand is falling outside China, with Japan's Nippon Steel the latest producer to idle blast furnaces and iron ore and met coal suppliers preparing to defend sales volumes.

Declines in steel output will impact iron ore and coking coal demand longer term, as suppliers seek to meet sales plans for the second quarter while reducing supply.

Many Atlantic Basin region mills have been working off low inventory during weak steel prices in 2019.

Several coking coal miners are yet to report outright cancellations of tonnages to contract customers in the Atlantic, with changes to volumes likely to be gradual or drawn out as the coronavirus pandemic hits activity.

Pressure on cash-flows and forward demand, as well as operational constraints from distancing measures for workers, is leading to some coal mines idling.

US coal producers have idled mines in Pennsylvania, Virginia and West Virginia, with Queensland implementing measures and BHP earlier hiring more workers to supports its mining operations.

Iron ore and coal producers in Canada, South Africa and elsewhere are working with government requirements hitting worker transportation and operations.

A suspension of investments and services for mining producers, with buyers keen to extend payment terms, has also been heard.

Iron ore and coking coal prices may find increasing support as Chinese activity and curbs to mine production offsets steel output slowdowns in other regions, according to investment bank ANZ.

"Lockdowns are impacting mine activities, which will offset some of the demand loss," ANZ said in a report Tuesday.

ANZ said demand for commodities "is likely to contract materially in the first half of 2020".

China recovery

China's ongoing recovery from its coronavirus outbreak and "supply-side constraints will also be supportive in the months ahead", ANZ said.

China's infrastructure-led stimulus may support iron ore demand and Chinese iron ore port stocks are "still not high," it said.

China's iron ore stockpiles reduced during 2019 as Brazil's dam disaster led to mine suspensions and checks, and China's higher steel output and resultant high iron ore spot prices led to drawdowns.

China's steel output, predominantly produced from blast furnaces, is less exposed to auto grades than many other regions, with stronger demand for construction and structural steels.

Flat steel markets in Europe, Japan and Brazil mainly rely on steel producers using iron ore.

In 2019, China's long steel production accounted for about 49% of output, flat steel grades took a 45% share with pipes comprising 7%, according to industry data analyzed by S&P Global Platts.

About 62% of new crude steel capacity of 35 million mt/year commissioned last year in China was for long steel, with the balance was for flat steel.

COVID-19 response plans by some steelmakers in Europe to produce up to 50% less crude steel in the meantime after banking furnaces, is not yet borne out in met coke and coking coal markets.

The kind of reductions reportedly planned for steel is not translating in similar reductions for coking coal and coke sales for Q2, a European supplier said. A gradual decline and shifts in raw materials portfolios may limit sudden changes to volumes and demand, he said.

Auto-grade steel and metals demand may be hit harder than other segments, as ANZ expected weaker auto sales could hit demand for cyclical commodities.

ANZ expected a 10% decline in auto sales this year, worsening from a 6% decline in 2019.