January 23, 2022

New lockdown in China raises investor concerns over steel and iron ore

Chinese Demand for Iron Ore Has Been Very Good, IRC Says

New lockdown in China raises investor concerns over steel and iron ore

New lockdown in China raises investor concerns over steel and iron ore

New wave of Covid-19 cases in China’s Hebei province sparks transportation restrictions in main manufacturing region.

Lockdown in Hebei extends to areas surrounding steel mills, limiting the ability to transport metal to customers. China is the largest steel producer in the world. Analysts say Hebei accounts for over 20% of the country‘s total production.

The number of coronavirus cases in Hebei has been rising since the beginning of the year, prompting the province to isolate its capital, Shijiazhuang, and at least two other areas to contain the spread of coronavirus.

The restrictions are unlikely to affect steel production at this point, but they could hurt demand by prompting the manufacturing sector to shut down earlier than planned ahead of the massive Lunar New Year holidays. It was reported earlier this month by commodity data provider S&P Global Platts.

According to analysts, demand and prices for raw materials used to make steel, such as iron ore, could also rise..

Truck deliveries of steel have been suspended in Hebei. Railways remained the only way to transport steel, Chinese metals data provider Mysteel from Shanghai said last week. The report says that the road blockage has led to an oversupply of steel at large enterprises in the region..

«Partial blockages limited the transportation of goods, which in the first half of January led to a sharp increase in inventories at local steel mills rather than warehouses», – told CNBC in an email Attila Widnell, co-founder of the Singapore-based Navigate Commodities.

«We have heard anecdotal evidence that some stock sellers and traders do not want to restrict cash flow if “soft lockdown” will last or intensify», – he added.

S&P Global Platts said stocks at Jingye Iron & Steel in the provincial capital of Hebei Shijiazhuang are growing. Company cited a source at the mill, which produces 13 million metric tons of crude steel per year.

Manufacturing and construction sites in China are scheduled to close earlier than usual ahead of the lunar New Year holidays from February 11 to 17. This is likely to reduce the demand for steel, which is widely used in these sectors..

According to S&P Global Platts, Government Advised Workers And Builders To Return Home Before Peak Vacation Period.

«Beijing has done so in an effort to reduce the likelihood of an increase in COVID-19 cases during and after the lunar New Years, according to market sources.», – the company noted.

An early shutdown suggests that demand for steel will fall, leading to an increase in inventories elsewhere.

«Some traders have said they are reluctant to increase their steel inventories as they expect they will have to hold them for much longer than usual and as steel prices continue to rise, inventories will put pressure on their cash flows.», – added to S&P Global Platts.

Daniel Hines, senior commodities strategist at Australian bank ANZ told CNBC on Monday the risks could also spill over to iron ore.

«There are concerns that a further rise in the number of coronavirus cases in Hebei could lead to lockdowns in some metallurgical regions. This will obviously affect the demand for iron ore, as steel mills are likely to experience supply chain disruptions affecting steel production.», – he suggested.

The effects of fluctuations can already be estimated at the cost of raw materials used to treat steel, such as coking coal, energy research consultancy Wood Mackenzie said..

According to Zhilu Wang, company researcher, coking coal prices are rising and are already about RMB 450 per tonne higher than last year.

«This is due to restrictions on inter-provincial transportation from Hebei province, which led to an increase in transportation fees», – pointed out Wang.

While this, in turn, could support steel prices, Wang predicted that the trend could weaken slightly overall as traders cut inventories due to uncertainty., related to Covid-19.