Lockdown to China’s new Covid-19 outbreak hit steel, iron ore

SINGAPORE – A new wave of Covid-19 cases in China’s Hebei Province has caused transport restrictions in the largest steel-producing region.

The closures in Hebei include areas around steel mills, which limits the ability to transport metal to customers. China is the world’s best steel producer and according to analysts, Hebei produces 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 close its capital, Shijiazhuang, and at least two other areas, in an effort to curb the spread of the coronavirus.

It is unlikely to affect curtain production at present, but it could hurt demand by encouraging the manufacturing sector to stop earlier than planned ahead of the big lunar New Year holiday, commodity data provider S&P Global Platts said earlier this month.

According to analysts, demand and prices for raw materials used to make steel such as iron ore could also skyrocket.

Steel deliveries by truck have been suspended in Hebei, and railways are the only way to transport steel, Mysteel, China’s supplier of metal data, said in Shanghai last week. The report states that blocked roads have led to finished steel accumulation at large mills in the region.

“Partial closures restricted the transportation of goods, leading to a sharper inventory held by local steel mills in the first half of January, rather than at inventory dealers,” said Atilla Widnell, co-founder of Singapore-based Navigate Commodities. said email to CNBC on Monday.

“We have heard anecdotal evidence that some traders and traders are reluctant to tie up the cash flow if ‘soft barrier’ is extended or tightened,” he added.

S&P Global Platts said stocks were rising at the Jingye Iron & Steel factory in the capital Shijiazhuang in Hebei. The firm cited a source at the mill, which produces 13 million tons of crude steel annually.

Production and construction sites in China will stop work earlier than usual before the lunar New Year holiday between 11 and 17 February. This is likely to suppress the demand for steel, which is widely used in those sectors.

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

“According to market sources, Beijing has done so in an effort to reduce the possibility of an increase in COVID-19 cases during and after the lunar New Year holiday,” the firm wrote.

Work that has been discontinued earlier indicates that demand for steel is going to fall, which is causing stocks to rise elsewhere.

“Some traders have said they are not prepared to increase their steel inventory because they expect it to hold on much longer than usual, and because steel prices will continue to rise, inventory stocks will put pressure on their cash flow,” S&P Global Platts said. added. .

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

“There is concern that a further increase in coronavirus cases in Hebei could lead to the closure of some steel-producing areas. This will obviously affect the demand for iron ore, as steel mills are likely to disrupt supply chains and thus affect steel production,” he said. he said. said in an email.

The ripple effects can already be seen in the cost of raw materials used to process steel such as cabbage, said Wood Mackenzie, a research consultant for energy.

Coke coal prices are rising and are about 450 yuan per tonne higher than last year, according to research firm Zhilu Wang.

“This is due to the restrictions on interprovincial transportation in Hebei provinces, which has led to the increase in the transportation fee,” Wang said.

While it may support steel prices again, Wang predicted that it could generally weaken slightly because traders have less of the commodity due to the Covid uncertainty.