Iron ore prices are weathering the market challenges posed by the COVID-19 outbreak, and while many consumption-based commodities are taking a hit, iron ore prices are recovering at a rabbit-pace in the wake of supply woes and recovery in demand.
Iron ore prices in China recovered substantially in the recent past, with prices of iron ore futures on the Dalian Commodity Exchange surging from RMB 569.50 (intraday low on 4 March 2020) to the present high of RMB 692.00 (intraday high on 18 March 2020), which underpinned a price appreciation of ~ 21.50 per cent.
China Crude Steel Production Surges Over 3 per cent on a Y-o-Y basis
As per the latest data released by the China Iron and Steel Association (or CISA), the crude steel production in China soared by 3.07 per cent against the previous corresponding period to stand at 155 million metric tonnes during the period of January to February 2020.
The daily average production of crude steel rose by 1.35 per cent on a yearly basis to stand at 2.58 million metric tonnes in January to February 2020.
During the period of January to February 2020, China produced 132 million metric tonnes of pig iron, up by 3.06 per cent higher as compared to the previous corresponding period.
The higher steel production, coupled with the supply woes due to the coronavirus outbreak in China supported the iron ore.
Supply Woes Grow As COVID-19 Strengthen Roots
Supply chain across the globe is one of the top-most impacted sectors of the COVID-19 outbreak, which , in turn, is providing cushion to the iron ore prices. As per some media houses, Vale is required to suspend its blended ore business in Malaysia until 31 March 2020, as Southeast Asia is undergoing a two-week partial lockdown.
South Africa has lockeddown one of its biggest iron ore delivery port- Saldanha along with reported 35 ports of entry in the wake of COVID-19 spread. The impact along the supply chain could be clearly witnessed from lower delivery across Chinese ports from Australia and Brazil.
As per the data from SMM, a leading data provider in China, iron ore deliveries leaving the Australia ports slipped by 1.37 million metric tonnes against the previous week for the week ended 14 March 2020. Also, for the same week, the iron ore shipments from the Brazilian ports rose slightly by 560,000 metric tonnes to stand at 3.51 million metric tonnes.
However, the shipment of 3.51 million metric tonnes remained 50 per cent lower against the previous corresponding period.
Infrastructure Push Makes Rebar Profitable Again
As per the data from National Bureau of Statistics, China produced 33.96 million metric tonnes of steel rebar during the period of January to February 2020, which remained 2.2 per cent down against the previous corresponding period amid the impact of the coronavirus outbreak on production activities.
The data from NBS also suggests that the production of wire rod fell by 4.9 per cent on a Y-o-Y basis to stand at 21.52 million metric tonnes in January to February 2020.
Whilst the production of steel rebar fell across China, the consumption of the construction steel is accelerating in China since mid-March, which in turn, is pushing the profit gap of steel rebar with steel HRC higher. As reported by SMM, the profit gap is anticipated to expanded 126 yuan per metric tonne (as on 17 March 2020), up by 10-30 yuan per metric tonne, while the national average prices of rebar surging over 100 yuan per metric tonne on an MTD basis (as on 17 March 2020).
The market anticipates that the increase in profit gap for steel rebar would propel the production of steel rebar; however, industry experts believe that the surge in profit gap for rebar against HRC would not prompt mills to shift their molten iron to produce steel rebar amid high domestic inventory and uncertainties around the strength in the steel rebar price recovery.
To Know More, Do Read: Iron Ore Bounces: Prices Above Contract Average While MOI for May 2020 Remains the Highest
As assessed by SMM, as on 12 March 2020, the steel rebar inventory in China, including both social and across steelmakers, remained 83.1 per cent higher on a Y-o-Y basis (lunar calendar) to stand at 21.47 million metric tonnes. Likewise, for the same period, the overall HRC inventory stood 65.37 per cent higher.
To Know More, Do Read: Iron Ore Might Whiplash Your Returns Ahead; Things to Consider Before Pulling Trigger
Speculators Questioning Strength of The Rebar Price Recovery
Many industry experts are anticipating that the recovery in rebar profitability and its prices is on a weaker footing, and there are yet uncertainties around the sustainability of the slightly improved steel prices.
Economic figures, which recently emerged for China suggest that market anticipation is least likely to go wrong. The industrial production in China fell drastically for March 2020 with industrial production Y-o-Y change of -13.5 per cent, which remained significantly down against the previous month positive Y-o-Y change of 6.9 per cent and the market expectation of a 3 per cent drop in March 2020.
The nominal urban fixed-asset investment fell by 24.5 per cent against the previous corresponding period during the first two months of 2020, which also marked the first drop since the data series began in 1996. More than the fall in industrial production, the fall in investment across fixed-income assets such as roads, grids, properties, etc., marks a negative environment for steel rebar. The fall in YTD investment across the fixed assets remained significantly low against the market expectation of -2.0 per cent and December 2019 (YTD) growth of 5.4 per cent.
Collaborative Efforts of Central Banks, Yet A Ray of Hope for Market Recovery
Central banks across the globe are showing a front foot to deal with the arrested global economic growth due to the coronavirus outbreak and are undertaking many policies to bring in more liquidity in the market and credit for thee households and businesses.
Likewise, in China, the banks distributed 906 billion yuan of new loans in March 2020 to boost the liquidity; however, the cash distribution remained 17.63 per cent down against the market expectation of 1.10 trillion yuan, and down by 72.87 per cent against the previous distribution of 3.34 trillion in December 2019.
The lending of new loans, however, includes 300 billion yuan credit for small and medium businesses, and the fall in credit is not largely due to the virus outbreak but is a seasonal effect as banks usually front-load during the beginning of the year.
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