Blockades after the new Covid-19 outbreak in China impact steel and iron ore

SINGAPORE – A new wave of Covid-19 cases in the Chinese province of Hebei has caused transportation restrictions in the main steel-producing region.

The locks in Hebei include areas around steelmakers, limiting the ability to transport 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 production.

Coronavirus cases in Hebei have increased since the beginning of the year, prompting the province to block its capital, Shijiazhuang, and at least two other areas in an effort to stem the spread of the coronavirus.

The restrictions are not expected to affect steel production for the time being, but they can hurt demand by encouraging the manufacturing sector to stop work ahead of schedule before the Lunar New Year holiday, said commodity data provider S&P Global Platts earlier this year. month.

Demand and prices for raw materials used in the production of steel such as iron ore may also skyrocket, according to analysts.

Steel deliveries by truck have been halted in Hebei, leaving the tracks as the only way to transport steel, Shanghai’s Chinese metal data provider Mysteel said in a note last week. The report said that blocked roads led to steel piling at major mills in the region.

“Partial blockages have restricted the transport of goods, resulting in a more marked increase in inventories held by local steelmakers, rather than stockists in the first half of January,” said Atilla Widnell, co-founder of Navigate Commodities in Singapore, in a email to CNBC on Monday.

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

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

Manufacturing and construction sites in China are expected to stop working earlier than normal before the Lunar New Year holiday between 11th and 17th of February. This will likely affect demand for steel, which is widely used in these sectors.

The government 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 an effort to reduce the possibility of an increase in COVID-19 cases during and after the Lunar New Year holidays,” the company wrote.

The work that stopped earlier suggests that steel demand is likely to fall, causing inventories to rise elsewhere.

“Some traders said they were not willing to increase their steel stocks, as they expect to keep them for much longer than normal, and with steel prices continuing to rise, rising stocks will put pressure on their cash flows” , added S&P Global Platts. .

Daniel Hynes, senior commodities strategist at Australian bank ANZ, told CNBC on Monday that the risks could spread to iron ore.

“There are concerns that a further increase in coronavirus cases in Hebei could result in the blocking of some steel-producing regions. This would obviously impact demand for iron ore, as steelmakers would likely see supply chains disrupted, thus impacting production steel, “he said in an email.

The ripple effect can already be seen in the costs of raw materials used in the processing of steel, such as metallurgical coal, said energy research consultancy Wood Mackenzie.

Coking coal prices are rising and are about 450 yuan per ton higher than last year, according to Zhilu Wang, an associate researcher at the company.

“This is due to restrictions on interprovincial transport in Hebei provinces, which has resulted in an increase in the transport rate,” said Wang.

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