Iron ore supply shock to offset EU demand collapse: analyst

London — The iron ore sector is about to face a supply shock which should limit its expected second quarter price fall even as steelmaking activity wanes in Europe, analysts at broker Jefferies said Wednesday.

"Supply disruptions (from COVID-19 production curbs) in India, South Africa and Canada alone will temporarily impact as much as 120 million mt/year of iron ore supply, which equates to 8% of seaborne supply and would be similar in magnitude to the peak of the 2019 supply shock following the Brumadinho tailings dam disaster and weather-related disruptions in Australia," analysts led by Christopher LaFemina said in a note to clients.

"Iron ore miners in Australia (Rio, BHP, FMG) and Brazil (Vale) are the relative winners for now, while blast furnace steel operators should face margin compression," the analysts maintained.

Jefferies forecast an average Q2 price for 62% Fe iron ore fines delivered to China of $68/mt, compared to the current spot price of around $87/mt.

S&P Global Platts assessed the 62% Fe Iron Ore Index at $87.05/dry mt CFR North China Wednesday, up $2.75/dmt on the day, as sources noted a tendency for end users to procure in a rising market.The front-month April TSI swap was up $2.40/dmt on day at $84.85/dmt Wednesday.

Iron ore prices – which hit a five-year high in mid-2019 on curbs following the Brumadinho accident – have in recent weeks remained relatively strong due to lower iron ore production within China on COVID-19 restrictions and weather-related disruptions to exports from Brazil and Australia. Domestic Chinese iron ore production typically accounts for 20% of supplies to the world's biggest steelmaker, Jefferies said.

Now, disruption to shipments from 21-day lock-down restrictions in South Africa and in India – where iron ore exporters have declared force majeure – and new government directives from Canada may partially offset the market negatives, Jefferies said. These negatives include the current collapse in European demand – which accounts for 9% of seaborne iron ore demand –the impacts of a substantial steel inventory overhang in China, and restarts of scrap-based Chinese electric arc furnaces, which don't use iron ore, it said.

Steelmakers in European nations including Italy, Spain, Germany and France have in recent days shut mills or trimmed production as government impose restrictions to curb the spread of COVID-19.