Analysis: Coronavirus fears weigh on steel markets

Activity in the global steel and ferrous raw materials markets is on hold as market participants await clarity amid the extended lunar new year holiday in China, following the coronavirus outbreak originating in the Chinese city of Wuhan, Hubei province.

China's General Office of the State Council yesterday extended the national 24-30 January lunar new year holiday to 2 February. But some localities — Shanghai, Jiangsu and Zhejiang province — have extended the holiday to 9 February, and more such extensions could follow.

The effect of the virus outbreak on steel and related raw materials markets are still relatively muted. The lead-up to and the month following the first day of the lunar new year holiday in China are typically lull periods and any significant impact on the markets is only likely to emerge after the end of the official holiday period in the second half of February.

Most construction projects in China are idled for a month in winter. The national holiday lasts for a week, but migrant workers are often given a month or longer to travel to their home towns.

A major steelmaker in east China has indicated that its operations will continue as usual over the holiday and workers are returning from the break as scheduled, a mill official said.

Blast-furnace-based steelmakers maintain operations over the holiday to keep crude steel output from dropping significantly. This sends steel inventories soaring to annual peaks in late February and early March each year.

Scrap-based steelmaking from electric arc furnaces (EAFs) shut down over the holiday and the outages are likely to be extended. EAFs account for less than 10pc of overall crude steel output.

The Shanghai Futures Exchange (SHFE) is scheduled to resume trade after 2 February despite the holiday extension to 9 February in Shanghai.

Most participants that Argus spoke with said they are waiting for their companies to tell them when they will need to return to work and some have been asked to work from home.

The Chinese government has adopted traffic controls and quarantine measures in many cities to prevent the virus from spreading. Public transportation such as long-distance bus services and taxis were suspended in many cities. In Hebei province, 37 bus lines have suspended operations from today, state-owned news agency Xinhua said. This includes bus services in major steelmaking hub Tangshan, potentially affecting the ability of mill workers to get to plants. Railway services were halted in some regions, including Hubei province.

Post-holiday impact

While there is still little immediate impact on the market, most steel traders anticipate prices falling because the virus outbreak is expected to have a more severe impact on steel demand after the holiday.

Factories will suffer from a shortage of workers because of the extension of the holiday and traffic controls. Construction sites in many cities are not allowed to resume work after the holiday until further notice.

Demand will be weaker for rebar and coil, and the downstream market will be reduced, pushing back demand for finished steel products.

Trading activity in Europe, and the Middle East and north Africa (MENA) is on hold, as the market seeks to understand the extent of the impact the virus is having on the Chinese steel industry.

"The virus is bad news. People were thinking that the market would be better after the lunar new year holiday, but that is no longer certain," a trader said. "No-one wants to go to China or carry raw materials and finished steel, so it is negative for the market," a mill said.

But not all are as bearish. The virus outbreak and the extended holiday could have a negative impact on prices in the short term, as mills conclude fewer bookings for the local and export markets. But production will have to be lower in January and February as a result, a trader said.

Traders with coils, billet and rebar position cargoes are becoming more nervous and looking to offload the material now in case prices fall, which could see some lower bookings concluded in the market in the next few days.

"The virus is a huge risk — the potential impact and probability is getting higher every day. One week of extended holiday in China will have a big effect," a sell-side market participant said. Plunging iron ore prices are affecting sentiment, but not yet to the same extent as a sudden sharp drop in scrap prices would. The decline in iron ore prices, if sustained, would be reflected in basic oxygen furnace (BOF) mill iron ore prices with a few months' lag.

Uncertainty over raw material supplies

The import of iron ore and coking coal and the export of steel may be affected, depending on the length of port closures. Jingtang port and Caofeidian port in Tangshan city are closed from 28 January until further notice, market participants said. Only vehicles carrying medical supplies are allowed to enter and leave ports. The port authorities have not issued official notices on the closures or when they will reopen.

These closures would halt truck shipments of iron ore to mills. But with most mills having restocked ahead of the holiday and their existing iron ore inventories at high levels, a brief outage would not affect steel output.

"While the market impact of the coronavirus outbreak remains uncertain, there could be a delay in the resumption of domestic coal mines, which is expected around mid-February or even later depending on the seriousness of the outbreak," a Singapore-based trader said.

Jingtang and Caofeidian are major coking coal import hubs but these ports have already been subject to tighter custom clearances for Australian coking coal since mid-January.

Following the signing of the US-China interim trade deal earlier this month, the lifting of China's retaliatory tariff on US coking coal is highly anticipated by US mining firms. Some mining firms have suggested that China's 25pc tariff on US coal imports may be lifted as soon as 15 February and some have offers ready for the Chinese market. But port closures and the holiday extension mean there is now less certainty over how soon tariffs will be lifted, a mining firm said. Chinese buyers are unlikely to move to secure volumes until there is an official confirmation of tariff changes.

By Chris Newman, Xia Ji, Lora Stoyanova, Greg Holt, Dylan Wong and Siew Hua Seah