The fast-spreading coronavirus could present a serious setback to China’s economy. The outbreak is likely to reduce steel and scrap prices as demand, labor, production, and logistics are impacted by it.

 

China is taking extensive measures to curtail the outbreak, including extending its Lunar New Year holiday break that will affect employee travel and delay resumption of plants and work-related actions. The Chinese state council has extended the holiday until February 2, but many of the country’s city and state governments have mandated companies to remain closed at least until February 9. 

 

The virus, which was declared to be a global health emergency by the World Health Organization on Thursday, has resulted in 170 fatalities and affected more than 7,700 people in China. 

 

The long-term impact of the epidemic is hard to predict at this early stage, but in the short-term, the outbreak has impacted demand as well as logistics in the steel industry in China, while creating global uncertainty.

 

Impact on domestic steel

The Asian country is a leading global iron ore user, consuming close to 1.5bn mt of iron ore in 2019. However, it took the iron ore index down 8pc on Jan 28, on reports of businesses suspending operations due to the outbreak according to Chinese government reports.

 

Public transportation was suspended in Tangshan, China’s largest steel producing center, on Jan 28, affecting the raw materials sector, leading to reduced steel demand and putting pressure on steel prices.

 

Impact on global steel

China has also offered force majeure protection to local steel businesses that are unable to meet global contractual duties due to the coronavirus, according to a Jan 30 statement by the China Council for the Promotion of International Trade. Force majeure requirements can differ based on how they were drafted contractually by the parties, but they may cover events such as the current outbreak, based on how it impacts suppliers, customers and end consumers. 

 

Companies affected should refer to the force majeure provisions in their contracts to determine whether they should be applied. 

 

The short term drop in Chinese steel production and demand related to the outbreak, could result in higher steel production elsewhere leading to high inventories, which, in turn, will lower steel prices globally.

 

Market participants who spoke with Davis Index are also uncertain on how the virus may impact the US steel trade at this time.

 

Market participants believe, steel demand could fall temporarily but a likely stimulus by the Chinese government in H2 could offset the short-term impact of the virus and lift demand. Thus, a reduction in output may not be as damaging in the long-term, due to costs involved in reducing supply.

 

China, a leading global steelmaker, generated almost 1bn mt of crude steel in 2019, an increase of 8.3pc compared to 2018 and accounted for 53.3pc of global output. The upward trend is projected to continue in 2020 and reach 1.03bn mt, not counting temporary setbacks that may result from the virus. 

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