Lockdowns after new Covid-19 outbreak in China impacted steel and iron ore

SINGAPORE – A new wave of Covid-19 cases in China’s Hebei province has triggered transport restrictions in the main steel-producing region.

Lockdowns in Hebei include areas surrounding steelworks, limiting the ability to transport metal to customers. China is the world’s largest producer of steel, and analysts say Hebei contributes more than 20% of the country’s total production.

Coronavirus cases in Hebei have increased since the start of the year, prompting the province to lock down its capital, Shijiazhuang, and at least two other areas in a bid to contain the spread of the coronavirus.

The brakes are unlikely to affect steel production at this time, but they could hurt demand by causing the manufacturing sector to halt work earlier than expected before the major Lunar New Year holiday, the supplier said. data on S&P Global Platts commodities earlier this month.

Demand and prices for raw materials used to make steel like iron ore could also increase, analysts said.

Steel deliveries by truck have been suspended in Hebei, leaving rail as the only means of transporting steel, Shanghai-based Chinese metals data provider Mysteel said in a note last week. The report says blocked roads led to the full stacking of steel at major factories in the region.

“Partial lockdowns limited the movement of goods, resulting in a sharper increase in inventory held by local steel mills rather than stockists during the first half of January,” said Atilla Widnell, co-founder of Navigate Commodities , based in Singapore, in an email to CNBC on Monday.

“We have heard anecdotal evidence that some stockists and traders are reluctant to tie up cash flow in the event that a ‘soft lockdown’ is prolonged or intensified,” he added.

S&P Global Platts said inventories were increasing at the Jingye Iron & Steel plant in Shijiazhuang, the capital of Hebei. The company cited a source at the plant, which produces 13 million metric tonnes of crude steel per year.

Manufacturing and construction sites in China are expected to stop work earlier than usual before the Lunar New Year holiday between February 11 and 17. This is likely to hit the demand for steel, which is heavily used in these sectors.

The government has advised manufacturing and construction workers to return home before the peak holiday season, S&P Global Platts said.

“According to market sources, Beijing has done this in (a) effort to reduce the possibility of a spike in COVID-19 cases during and after the Lunar New Year holidays,” the firm wrote.

Work stopping earlier suggests demand for steel is on the verge of falling, leading to increased inventories elsewhere.

“Some traders have said they are unwilling to increase their steel inventories as they expect to have to hold them much longer than usual, and with steel prices soaring, construction inventory will put pressure on their cash flow, ”added S&P Global Platts. .

Daniel Hynes, senior commodities strategist at Australia’s ANZ bank, told CNBC on Monday that the risks could extend to iron ore.

“There are fears that a further rise in coronavirus cases in Hebei could lead to the lockdown of some steel regions. This would obviously impact demand for iron ore, as steel mills would likely see supply chains disrupted, affecting thus steel production, ”he said. said in an email.

The ripple effects are already visible in the costs of raw materials used to process steel such as coking coal, said energy research consultant Wood Mackenzie.

Coking coal prices are skyrocketing and are about 450 yuan per ton more than last year, according to Zhilu Wang, a research associate at the company.

“This is due to restrictions on interprovincial transportation in the Hebei provinces which have resulted in increased transportation costs,” Wang said.

While this in turn may support steel prices, Wang predicted that it could weaken slightly overall, as traders stock less commodities due to the uncertainty of Covid.