London — Iron ore prices have taken a hit from coronavirus, with Singapore Exchange prices dropping sharply over the week, but they could still be bolstered by any supply side disruptions, analysts from Wood Mackenzie said Friday.
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The price fall "has been driven by fear; uncertainty over the scale and impact of the virus on iron ore demand, and a lack of volume during the Chinese New Year," bulks analysts Robin Griffin, Rohan Kendall and Dale Hazelton, said in a report on the virus' impact on bulk commodities. "In view of iron ore's vulnerability to further supply side disruptions, and the potential for Beijing to provide financial stimulus to the steel intensive construction and infrastructure sectors later in the year, we see no immediate need to revise our CY 2020 price forecast of $80/t CFR."
S&P Global Platts assessed the 62% Fe Iron Ore Index at $82.55/dry mt CFR North China Friday, down 10.3% on the week, as the spread of coronavirus weighed on demand concerns in China, with some Chinese steelmakers reportedly reducing output rates by up to 20% in February due to transport difficulties and stalled construction projects.
EAF MILLS TO BEAR BRUNT OF REDUCED DEMAND
The Wood Mac analysts nonetheless expect the impact on iron ore demand to be "relatively muted. Despite the likelihood of an extended post-holiday slowdown in construction and manufacturing, Chinese BF-BOF steel production should remain resilient with most of the large integrated operations continuing to operate, albeit at a reduced rate," they said in the report. "If, and when, steel production does respond to the inevitability of slower end use demand from construction, China's EAF producers will bear the initial brunt, given relatively high operating costs and relatively low margins."
A decline is steel demand is nonetheless "inevitable," according to Wood Mac, which sees that this will affect both steel prices and margins, and lead metallurgical coal demand between March and May to be lower than it otherwise would have been. Domestic coal mining will also face restrictions as a result of the virus, the consultancy said.
"The virus outbreak has prompted a downward adjustment in our (metallurgical coal) price forecast for Q2 2020 and a very modest increase for Q3, due to a forecast delay in the Chinese spring steel demand increase."
CHINA GROWTH OUTLOOK SEEN AT RISK
Steel destocking from high inventories – originally expected to occur on the seasonal restart of construction activities in March – is no longer expected to occur due to attempts to limit the spread of the coronavirus. "With rebar inventories already higher than the last two years, steel prices and margins will be squeezed," the analysts said. "Declining prices in China will likely also have a knock-on effect on steel markets outside China."
More broadly, the coronavirus epidemic has already started to undermine China's domestic economic sentiment, placing the country's growth outlook at risk and "is a new wildcard for bulks demand," the analysts said.
"With the 13th National People's Congress taking place in Beijing on 5 March, we expect the discussion will likely include stimulus policies to minimize the negative impact of coronavirus on full-year 2020 economic performance," they said, adding that construction and manufacturing are two likely ways the central government will look to drive growth, which could help keep demand for steel, iron ore, metallurgical and thermal coal resilient, despite the hit in the near term.