Iron ore prices face new pressure as China’s COVID-19 outbreak intensifies, but strategists say the lockdowns will only have a short-term effect on the price of the commodity in bulk ahead of an expected rebound in steel demand as early as next month.

The price of iron ore traded on the spot market fell for a second consecutive session on Tuesday, falling 3% to US $ 143.40 a ton according to S&P Global Platts. Prices have fallen more than 10% since the start of this month. The April futures contract traded in Singapore edged down 0.4% on Wednesday to US$145 a tonne.

Coronavirus outbreaks have spread to 28 provinces across China, with the country’s main steelmaking hub, Tangshan City, announcing emergency checks this week after a spike in cases.

While domestic demand for steel has been hit harder than production so far, S&P Global Platts said prices for the material remained stable as the market anticipates a strong recovery in construction and manufacturing activity in April. , when infections should stabilize.

“Factories affected by the lockdown have brought forward the maintenance they had planned for the next few months to mitigate the longer-term implications, hoping that if the lockdowns are short, they can continue to resume production of steel,” said Daniel Hynes, commodities manager. strategist at ANZ.

“The market is getting a bit nervous about the short-term impact of the shutdowns, but I think these restrictions will spur more resolve on the part of authorities to spur economic growth as they consider additional policy support.”

China’s zero COVID-19 strategy contributed to its crude steel output plummeting 10% year-on-year in February to around 75 million tonnes, according to data released by the World Steel Association on Tuesday. steel.

This led to a drop in global production for the second consecutive month to 142.7 million tonnes, down 5.7% from the previous year.

There is evidence that this weakness continued into March, with market sources in eastern Shanghai and southern Guangdong province telling S&P Global Platts that their steel sales are currently only around 50 or 60 % of the levels of the same period last year.

“Indeed, many construction sites had been forced to suspend work due to restrictions on gatherings, while manufacturers’ production had also slowed due to the quarantine of staff or restrictions on the transport of materials. raw,” he said in published research.

Weak end-user demand also led to an increase in structural steel inventories in Beijing. In the same period last year, inventories were following a weekly decline of 7 to 9% due to strong seasonal demand.

Macquarie’s commodities strategy team said on Wednesday that “stripping steel mill margins and COVID-related logistical disruptions could limit iron ore prices in the near term, in addition to government intervention.”

According to S&P Global Platts, some steel mills in eastern China said mills across the country have already drawn up plans to maintain normal production throughout the COVID-19 restrictions.

Meanwhile, strategists say the threat of slowing economic growth caused by China’s zero-tolerance strategy could prove to be a blessing in disguise due to the possibility of accelerated stimulus measures to correct a slower growth.

“In a weird way, this could bolster sentiment for the rest of the year,” Mr Hynes said. “The government has already tackled similar issues by increasing infrastructure spending, and the backdrop for iron ore remains relatively positive.”

Hynes also noted that China’s current approach of locking down specific regions is different from the sweeping restrictions used when the pandemic first hit.

“I’m not too concerned about the longer-term effect on iron ore as China is taking a more targeted approach this time around,” he said.
Source: Australian Financial Review