Lockouts after the new outbreak of Covid-19 in China affect steel, iron ore

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

Hebei lockdowns include areas around steel mills, limiting the ability to ship the metal to customers. China is the world’s largest steel producer, and analysts say Hebei contributes more than 20% of the country’s total output.

The number of coronavirus cases in Hebei has risen since the beginning of the year, prompting the province to close its capital, Shijiazhuang, and at least two other areas in an effort to stem the spread of the coronavirus.

The curbs are unlikely to affect steel production for now, but they could hurt demand by prompting the manufacturing sector to retire earlier than planned ahead of the big New Year holiday, commodity data provider S&P Global Platts said earlier this month.

Analysts say demand and prices for raw materials used to make steel such as iron ore can also skyrocket.

Steel delivery by truck in Hebei has been suspended, making rail the only way to transport steel, Shanghai-based Chinese metal data provider Mysteel said in a note last week. The report said blocked roads have resulted in completed steel piles at major mills in the region.

“Partial lockdowns have limited the movement of goods, resulting in sharper stocks from local steel mills rather than merchants in the first half of January,” said Atilla Widnell, co-founder of Singapore-based Navigate Commodities, in an e mail to CNBC on Mondays.

“We have heard anecdotal evidence that some stockholders and traders are reluctant to lock in cash flow in case a ‘soft hold’ is extended or intensified,” he added.

S&P Global Platts said inventories are rising at the Jingye Iron & Steel plant in Shijiazhuang, Hebei’s capital. The firm cited a source at the plant, which produces 13 million tons of crude steel per year.

Manufacturing and construction sites in China will stop working earlier than usual in the run-up to the Lunar New Year holiday between Feb 11-17. This is likely to affect the demand for steel, which is heavily used in those sectors.

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

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

Earlier work stoppages suggest that demand for steel will fall, pushing up stocks elsewhere.

“Some traders said they were unwilling to increase their steel stocks as they expect to hold them much longer than usual, and as steel prices continue to rise construction stocks will put pressure on their cash flows,” said S&P Global Platts. .

Daniel Hynes, senior commodity strategist at Australian bank ANZ, told CNBC on Monday that risks could spill over to iron ore.

There is concern that a further increase in the number of coronavirus cases in Hebei could lead to some steel producing regions being blocked. This would clearly affect the demand for iron ore as steel mills would likely see supply chains disrupted, which would would affect steel production, ”he said in an email.

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

According to Zhilu Wang, a research associate at the company, the prices of coking coal are on the rise, about 450 yuan per ton higher than last year.

“This is due to the restrictions on inter-provincial transport in Hebei provinces, which has resulted in an increase in transportation costs,” Wang said.

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