Iron ore outlook bearish as steel demand seen weak on coronavirus

The outlook for iron ore is negative with steel demand seen weak due to the coronavirus, overshadowing recent supply tightness out of Brazil, according to market sources contacted over the past few days.

The only new factor pointing to possible further tightness is a storm off the north of West Australia's coast that is seen as likely to develop into tropical cyclone Damien, which is likely to head toward the Pilbara coast and the Walcott and Dampier ports, key loading centers for iron ore.

Although the current situation still remains highly volatile with estimates of the exact storm path and strength still largely unclear, any impact on loading schedules could place further strain on supplies that have already been tightened due to the monsoon season in Brazil.

Prices are still falling, with the SGX March TSI iron ore swap at $77.95/dmt as of 3:30 pm Singapore time, down $2.85/dmt from Tuesday 5.30 pm.

With no clear forecasts on when the virus may be contained, helping construction activity to pick up, end-users are likely to keep lowering production rates or use cheaper iron ore to cut costs, market sources said.

Key factor

Weekly inventory levels for steel stockpiles are a key factor for end-users to decide how much to cut production rates, with some end-users prioritizing maintaining sufficient stockpiles of raw materials given possible logistical difficulties transporting from Australia ports, several traders said. If steel stockpiles are accumulating too fast, a sharp cut in production rate can be expected, an international trader said.

Since January 30, China has been offering force majeure certificates to local companies which are unable to fulfil international contractual obligations due to the coronavirus outbreak.

Steel mills and buyers surveyed by S&P Global Platts this week indicated no plans to invoke this option despite expectations of weaker steel demand.

Several Chinese mills have indicated that there are other alternatives if there is indeed excess iron ore supply, such as negotiating for slower discharges or other negotiable terms rather than declaring force majeure.

Export data seen by Platts have shown weak volume from Brazil due to the monsoon season, with the weekly average of Brazilian exports over the past five weeks at 5.2 million tonnes, down from the 2019 weekly average of 6.97 million tonnes. Several market sources pointed to expectations of continued weak volumes from Brazil due to strong monsoon rains.

Domestic Chinese port prices could be supported if end users further shift their demand there, leading to reselling opportunities, a Chinese trader said.