Opinion

Coronavirus: demand downgrades for bulk commodities

Our latest view on the impact on steel, iron ore, metallurgical coal and thermal coal

Rohan Kendall

Principal Analyst, iron ore and steel costs

Rohan is the Principal Analyst for global iron ore and steel costs

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The coronavirus outbreak is a rapidly evolving news story – and a real wildcard for bulks demand. Our global experts are monitoring the impact closely, and this article provides a summary of our latest forecasts for steel, iron ore, metallurgical coal and thermal coal.

When will China return to 'business as usual'? 

Looking first to the macro drivers, with cases of coronavirus declining in China, our base case assumption is that the country will effectively return to normal in April.

However, whilst companies may officially resume work, utilisation rates will be low for several weeks due to the impact of supply chain disruptions, and, more importantly, labour shortages. Right now, data from the Chinese authorities on national passenger volumes doesn’t point to a significant return to work with rail and air passenger volumes at negligible levels and only a modest uptick in highway volumes. This suggests that as many as 150 million of China's migrant workers remain in their home towns, rather than returning to work.

What does this mean for bulk commodities?

Steel

Iron ore

Metallurgical coal

Thermal coal 

Steel

Our working assumption is for Chinese finished-steel consumption to decline by 2.8% in 2020. With a quick restart and government stimulus, demand might fall a mere 1%. But the longer the current situation continues, the more the downside risks stack up – our working assumption is for a bigger fall. People are not earning money. When they return to work, are they likely to spend? Will the government stimulate investment in steel-intensive infrastructure? Or divert budget to healthcare and compensation to businesses? If consumption is put on hold, then full-year steel demand declines are likely to be in the range of -2.5% to -5%.

We currently expect Chinese crude steel production to see a 2.4% decline in 2020. So far, Chinese steel production – particularly via the blast furnace (BF) and basic oxygen furnace (BOF) route – has not been impacted as severely as demand. But that seems set to change. We have recently spoken with 20 steelmakers who are experiencing production disruptions, primarily due to high finished steel inventories followed by a shortage of raw materials. Although Chinese steelmakers could raise utilisation later in the year, the reduction in demand means they probably won’t need to.

As the charts below show, weak demand and logistics constraints have caused steel inventories to skyrocket, especially longs. Even if logistics problems are resolved, steel inventories will not immediately deplete until demand picks up.

Iron ore

Iron ore fares relatively better than crude steel, because electric arc furnace (EAF) steelmaking and scrap bear the brunt of the impact – at least initially. We have changed our working assumption for Chinese consumption of iron ore in 2020 from +1.7% to -1.2%. 

The flow through to iron ore pricing remains unclear, not least due to significant (unrelated) downward revisions to forecast seaborne supply in 2020, and uncertainty regarding the extent of Chinese domestic concentrate curtailments. It seems prudent to work on the basis that China’s seaborne iron ore requirement in 2020 will be at least 15 million tonnes lower than we previously thought.

Metallurgical coal

With the shortage in domestic Chinese supply for all metallurgical coal types, prices for imported coal have retained support.

Domestic supply continues to struggle. Labour and transport restrictions have curtailed deliveries from Shanxi, and a mine accident in Shandong is adding to near term disruption. Mongolian imports have slowed to a trickle since the border closure during February. Supply shortages in Australia and Canada helped to maintain this supply tightness in the seaborne trade. Between longwall movements and the loss of Moranbah North in Australia, and logistics issues from cold weather and protest disruptions in Canada, supply remained constricted from mid-January through February. Over the month, spot prices for Australian premium low volatile HCC averaged US$155/t, up from US$151/t in January. As supplies of premium coal dwindled late in February, prices breached US$162/t on the last trading day of the month.

Coking coal prices are set for a rollercoaster remainder of the year. High steel stocks are starting to limit production at blast furnaces, and coal supply looks set to improve from the middle of March. April looks likely to be a low point for prices, as coal supply normalises, and Mongolia reopens its borders. Improving steel demand in May through July – as construction sites restart – will help support coking coal prices. And the potential for sizeable Chinese stimulus from Q2 2020 provides some optimism that seaborne prices will be considerably higher by the end of the year, despite the possibility of prolonged virus impacts outside China.

Thermal coal

China's domestic supply is recovering vigorously with nearly 78% of capacity back in operation, according to the NEA. The capacity utilisation rate continued to pick up and hit 65%, double what it was at the beginning of the month.

Meanwhile, demand for thermal coal is increasing. But with only a third of companies having restarted operations, demand is resuming much slower than supply. This is causing stockpiles at ports and power generating companies (gencos) to build, which places downward pressure on the Qinhuangdao 5,500 price. We forecast this price to remain on a downward trend through March as supply continues to outstrip demand.

We have downgraded our full-year Newcastle 6,000 price to US$67/tonne. Being most exposed to the Chinese market, Newcastle 5,500 high-ash and Indonesian coal prices will bear the brunt of the Chinese oversupply, hitting their lowest level in April and then staying low for the remainder of H1. These prices will in turn drag on the benchmark Newcastle 6,000 price as coal buyers switch to the lower cost coals where they can.

In Europe, coronavirus has begun to spread quickly, with Italy having over 2,000 cases to date. The ARA price, though, is likely to remain stable as it is already so deep into the cost curve. Rather it will be continuing low LNG prices and strong renewables generation keeping a lid on European coal prices.

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