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COVID-19 Impacts — Contrasting Fortunes For Iron Ore And Steel In Asia

Highlights

Chinese demand for iron ore and steel rebounds strongly post-lockdown as steel supply expands to meet pent-up demand.

Chinese steel recovery strikes a contrast with the economic slump across Asia.

COVID-19 has weighed on steel production in Japan and South Korea, although iron ore imports have been robust.

Indian steel demand has been hit hard by ongoing lockdown measures, triggering deep cuts in steel production. Iron ore exports from India, however, are being buoyed by resurgent Chinese demand.

The coronavirus pandemic has triggered mixed fortunes for iron ore and steel in Asia. Buoyed by the removal of lockdown measures, Chinese demand for iron ore has been resurgent in the past few months. The Chinese restocking boom has driven benchmark iron ore prices to US$107 per tonne as of June 8 as steel production expands to meet pent-up demand. The Chinese recovery contrasts with almost everywhere else, however; steel production in ex-China Asia has been scaled back aggressively in response to the global pandemic's recessionary impacts on local demand and wider global trade.

We previously examined the pandemic's impacts to the European steel and iron ore markets. In this article, we explore the implications for iron ore demand, trade and steel production in Asia, and the prospects for the second half of 2020.

Steel — Supply down almost everywhere except China

Asia has fared somewhat better than Europe and the U.S. regarding the spread of COVID-19 and resulting mortality rates, at least for now. Lockdown measures have mostly been lifted across Northeast Asia, prompting a healthy recovery in Chinese economic activity in April and May. April saw Chinese crude steel production ramped up 7.7% month over month to reach 85 Mt. Operating rates at Chinese blast furnaces are currently averaging 91%, up from 80% in April and between 70% and 75% in March. The positive sentiment is also reflected in the record production of Chinese pig iron, with 2.4 million tonnes per day in April, which continued through the early weeks of May.

A rebound in Chinese steel demand has justified the positive supply response. Finished steel stocks have been drawn downward over the past few months as orders have ticked upward. Chinese rebar inventories had retreated to 8.2 Mt as of May 26, down from 13 Mt as of March 13. Pent-up Chinese demand helped lift steel imports by 12% year over year in January-May. Over the same period, Chinese steel exports dropped 14% year over year to 25 Mt. Chinese steel exports in May ran 30% lower month over month and 23% down from a year ago. With the global recession expected to further erode international trade, we forecast Chinese steel exports to drop to 54 Mt in 2020 from 64 Mt in 2019.

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The slump in global trade for steel and other manufactured goods has weighed on steel production elsewhere in Asia. Japan, South Korea and Taiwan saw steel output fall 24%, 8.4% and 16% respectively year over year in April. Automotive-grade steel demand has collapsed following a sharp contraction in vehicle sales. In the midst of a lockdown, India's steel output had Asia's sharpest decline to date. In April, steel production plunged 65% year over year, while January-April output contracted by 21% compared with a year ago. This amounts to a supply reduction of 8 Mt year over year by the world's second-largest steel producer. Indian steel demand has plummeted in recent months, with economic activity severely curtailed by COVID-19 lockdown measures.

Vietnam has been one of the few bright spots for Asian steel supply growth, helped by new capacity start-ups. Following a 30% rise in 2019, the first four months of this year saw crude steel output advance by a more sedate 4.7% year over year. We forecast Southeast Asian steel supply growth to remain broadly flat in 2020, with lower output forecast in Malaysia and Indonesia offset by increases in Vietnam and Thailand.

Iron ore — Trade outperforms demand

We estimate that total iron ore consumption by China, Japan, South Korea, Taiwan and India fell by 0.9%, or 5 Mt, year over year in January-April. While Chinese demand increased by 5.8 Mt, a slump in India's blast furnace and direct reduction output led to a 6.4-Mt decline in iron ore usage. Correspondingly, iron ore demand in Japan and South Korea contracted by 6%-7% year over year. In China, Japan, Taiwan and India, blast furnace output has not fallen as sharply as electric arc furnace, or EAF, steel production. Unlike EAFs, blast furnaces have less flexibility for temporarily switching off and on, which has led to a rise in surplus pig iron exports from Japan and India. Iron ore trade has fared comparatively well in the first four months of 2020, falling by 3.9% year over year in Japan and rising 1.4% in South Korea.

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In China, iron ore imports are expanding even faster than steel production, rising 19% year over year in April and 4% in May. Despite a fall of 9% month over month in May, the first five months of 2020 saw Chinese iron ore imports reach 445 Mt, up 5.1%, or 21.4 Mt, year over year. This compares with a corresponding 1.3% rise in Chinese steel output in January-April. Imports from Brazil were down 14%, or 11 Mt, year over year in the first four months. This has been offset by rises in shipments from Australia, India and South Africa, and from Ukraine, Russia and Sweden, which have diverted supply away from the depressed European market. In particular, a surge in iron ore exports from India has helped plug the shortfall in the seaborne market. Based on reporting country import data for iron ore, January-April arrivals from India soared 99% year over year to 12.4 Mt, with Chinese imports from India up 137%.

Rising concerns over the Brazilian supply chain buoyed restocking activity in May, as Chinese mills seek a buffer against potential supply disruptions. Despite these efforts, as of May 26, iron ore stocks at Chinese ports were at 110 Mt, their lowest level since late 2016.

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Also worth a mention is the 49% rise year over year in Chinese iron ore exports in January-April. This trade, however, is reexported iron ore arising from blending practices initially established by Vale in China, before other major producers followed suit. Vale's Brazilian iron ore blend is reexported to Japan, South Korea and Taiwan under the banner of Brazilian Blend Iron Ore Fines.

Outlook — Global recession expected to weigh on H2 recovery

The Chinese recovery has surprised on the upside, and more is to come. We expect the iron ore demand rally to continue over the next few months as Chinese steel production plays catch-up. The seasonal slowdown in Chinese steel production will likely be delayed into the September quarter, when we expect demand to moderate. We forecast Chinese iron ore imports to rise 3.7%, or 40 Mt, year over year in 2020 to reach 1.11 billion tonnes. The growth in Chinese imports will further displace high-cost domestic iron ore production.

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We expect the pace of Chinese iron ore demand growth to slow in the second half of 2020, tempered by the harsh realities of a global recession and the resulting contraction in international trade. Underlying our view is the expectation for moderate growth in steel demand in the Chinese construction sector in 2020, to be offset by lower demand from machinery, white goods, shipbuilding and export-focused sectors. We therefore forecast a 0.5% decline in Chinese steel production in 2020 and a 1% rise in pig iron output. Robust pig iron production contrasts with sharply curtailed Chinese EAF steel production, with profitability dented by high scrap prices.

Outside China, demand is very much in recessionary mode. A recent Nikkei survey points to an expected 22% decline in Japanese GDP in the June quarter, which would mark its worst quarterly showing since the end of World War II. With a number of blast furnaces offline, we forecast Japanese steel output to drop to 91 Mt in 2020, the lowest level since 88 Mt in 2009. Consequently, we forecast Japanese iron ore demand to contract by 9% in 2020.

We anticipate India to experience a pause in steel production growth for the first time since 1999, with a drop of 6% forecast for this year. Correspondingly, we forecast Indian iron ore demand to fall by 8%, dragged lower by a 12% decline in production of direct reduced iron. Vietnam, meanwhile, is expected to be one of the few bright spots for Asian steel supply growth in 2020, boosting iron ore demand by 5% year over year.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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