The future is back in the pits for steelmakers as demand falls rapidly

It is not a day too soon that leaders of the global steel industry — including the biggest of them all, ArcelorMittal — did acknowledge the enormity of demand shrinkage and logistical challenges of moving raw materials to and finished products out of mills that coronavirus would inflict.

ArcelorMittal, which recently in partnership with Nippon Steel acquired Essar Steel, and Tata Steel, which has integrated steelmaking operations in four Indian centres, have under Covid-19 pressure been idling steelmaking capacity and downstream finishing assets.

What options do steel groups have when orders from vehicle makers, auto component producers, construction and infrastructure projects continue to fall at a rapid pace and their margins come under pressure? The challenge for steelmakers is to preserve cash at any cost and shrink cost in tandem with reduced crude steel and finished products output.

Outside China, which had a 53.3 per cent share of world steel production of 1.87 billion tonnes (bt) in 2019, in Europe nearly 15 million tonne (mt) capacity is idled, in the US about 5 mt capacity is rested and Japan is doing with 3.3 mt capacity less. Demand for iron ore in South Korea, which too is exercising discipline in steel production, is down.

The Chinese steel industry will not stop surprising with its production. In the first two months of 2020, defying the novel virus playing havoc with people’s lives, China increased steel output by 3.1 per cent to nearly 155 mt. Apparently, this was good for iron ore demand. But this was largely negated by two factors. First, most observers believe that China — overburdened with steel inventories and dwindling profit — will soon apply a brake on production like the rest of the world. This will likely be the case in spite of economic intelligence service provider MySteel reporting some stocks dilution more recently. Second, in the current circumstances, China’s own production of iron ore returning to normal will put some pressure on ore price.

In recent years, West Asia — aided mostly by cheap power, local availability of some raw materials and steel demand growth — went on raising production. Now Covid-19 has forced Saudi Arabia’s Sabic Hadeed to close one of its two plants. Surprisingly, Iran, which bore the brunt of cornoavirus in the region, is yet to respond to the health crisis by slowing down its steel mill operation. Turkey will run its steel capacity at half or less till the situation improves.

The global steel industry encountering coronavirus-generated stiff headwind will automatically pull down the demand for and prices of iron ore and metallurgical coal, the two principal raw materials needed to make the ferrous metal using the blast furnace and basic oxygen furnace (BF-BOF) route. According to the World Steel Association, BF-BOF system accounts for as much as 75 per cent of world steel production. For the rest of steel made by melting scrap in electric arc furnaces (EAFs), direct reduced iron, pig iron and hot briquetted iron too are fed into furnaces. These supplementary materials are all made from iron ore.

China because of its mammoth share of the seaborne trade in iron ore, its buying at any point and now because of speculation swirling about whether the stimulus to be provided by Beijing to repair Covid-19-related damages to the economy will be bigger than what was offered during 2008-09 financial crisis will become the principal arbiter of this global commodity price. The UK-based Bulk Shipping Analysis estimates the 2019 seaborne trade in iron ore at 1.440 bt, a marginal year-on-year rise of 0.7 per cent. Data from the Chinese General Administration of Customs shows the world’s largest steelmaker brought in 1.069 bt last year compared with 1.064 in 2018. Last year’s imports, however, fall short of the 2017 record 1.075 bt.

Unfortunately, the combination of closure of mines in Goa and our good quality ore being priced out in the global market because of the 30 per cent export duty has seen us surrendering our once share of Chinese imports to Australia and Brazil. China’s December imports at 101.3 mt, when ports were functioning normally, were at a 27-month high.

Expansion of March factory activity evident in China’s official Purchasing Managers’ Index focussing more on larger state-owned companies showed a spurt to 52 from a record low of 35.7 in February when coronavirus-related restrictions on movement of people and goods were strictly enforced. Incidentally, the 50 mark separates expansion from contraction. Whatever that may be, China watchers say the recovery path for the country cannot but be slow and long. The 45 major Chinese ports are at this point holding ore stocks of a little over 116 mt, not that big an amount considering mill requirements at present capacity use. This compares with a high of 148.43 mt port inventory in 2019 early April.

A Bhubaneswar-based iron ore trader says: “The low Chinese port inventory should normally be considered good for ore trade as the country will go for stock replenishment. But reasoning about how iron ore prices should behave on a particular day on a particular development in time of coronavirus has so far proved a hopeless exercise. Any apparently good news coming from China such as more and more industrial establishments resuming operation is balanced out by closure or reduced steel mill operations in many countries creating pockets of ore surpluses, including India.”

Incidentally, here mining is declared as an essential service and therefore, iron ore extraction by captive and merchant miners is continuing in a falling demand scene. Otherwise, why should the country’s largest miner NMDC be reducing the price of both lump ore and fines by Rs 200 a tonne each.

For all commodities from crude oil to alumina to steel, the market remains firmly in a bearish grip. Iron ore might have escaped bear hammering for a good number of weeks since the surfacing of coronavirus at Wuhan in China’s Hubei province. But the mineral has now fallen in line with other commodities. In mid-January, iron ore traded at over $97 a tonne. It is now hovering around $80 a tonne.

Research group Wood Mackenzie’s Paul Gray says: “We’re not yet looking at a glut of seaborne ore. But risks are escalating and the balance is tilting towards a bigger hit to ore demand than supply.”

Hopes of Brazilian Vale, the world’s largest ore producer, that the market demand for the mineral will hold up for the remaining of the year if the virus is “better contained” soon have been dashed. The continuing rage of killer virus will force Val to “look at what the implications are.” A consensus is emerging among analysts that as the world moves towards a surplus of 40 to 45 mt ore because of steel production restriction in most places, the mineral may sell within a range of $60 to $70 a tonne in this year’s second half. Prices falling to $50 a tonne are not to be ruled out under the combined pressure of oversupply and cuts in steel output deeper than originally anticipated.