gui yong nian/Adobe Stock
Another victim of China’s coronavirus epidemic could well be the iron ore price.
Iron ore had a stellar 2019, reaching a five-year high of $125 per ton in July on the back of Vale SA’s Brumadinho mining dam disaster and Cyclone Veronica, which struck Western Australia in March.
Since then, the price has fallen back to just over $78 per ton in December and is currently trading around $90 per ton in Singapore — still well above prices this time last year.
Supply disruption was met with rising demand. China produced nearly 1 billion tons of steel in 2019 and consumed an estimated 875 million tons, spurred by stimulus-supported infrastructure spending and consumption from the construction market.
But despite that, the markets are reacting cautiously to iron ore prices.
The normal pattern, Reuters reports, is for prices to rally ahead of winter as steel mills build inventories for the start of the spring construction season, followed by a decline until a usually more modest summer pickup.
So far this northern hemisphere winter, 62% iron ore has gained 22% from its Nov. 11 low up to the close of $95.60 on Wednesday. This is about half of the 41% surge the steelmaking ingredient enjoyed last winter, when it went from $64.60 a ton in November 2018 to a peak of $90.75 in early February 2019.
Taken in the round, therefore, the market appeared not as confident of rising demand this year as last, even before the coronavirus epidemic hit.
With movement restrictions being extended almost daily, the fear is the outbreak could delay the return of workers to construction sites, in turn delaying iron ore and steel demand. One report suggests traders are taking up short positions to hedge the large physical purchases they have on the water due to arrive after the Lunar New Year holidays.
Those short positions are already chipping away at the iron ore price, the article reports, in Asia afternoon trade. SGX prompt-month 62% Fe fines futures fell by $3.70 per ton to $90.65 per ton, its lowest level this year. While the Dalian Commodity Exchange (DCE) May 62% iron ore futures fell by 2.3% to 649.5 yuan per ton ($93.70 per ton).
Although China’s output was picking up at the back end of last year — up 6.9% in December — the fear is that strength will fizzle out after the New Year holidays if the spreading virus impacts industrial production and construction. With iron ore output on a more stable footing than in 2019 and consumption at risk from a spreading epidemic, the scene is set for a weakening of steel and iron ore prices in the spring.
Automotive and manufactured goods were already down last year. Vehicle sales were down 8.2% in 2019 from the prior year and were forecast to drop a further 2% before the outbreak of the coronavirus. Visiting car showrooms is not likely to be a high priority just at the moment, so New Year holiday sales will be down even more sharply than previously expected.
Iron ore producers and their shareholders will be watching the spread of the virus and the authorities’ reaction with concern.
More than burst dams or poor weather, the epidemic has the potential to impact prices significantly in 2020.