What provided buoyancy to iron ore prices amid Covid 19 concerns?
How are iron ore prices expected to behave for the rest of 2020?
With the global outbreak of Covid 19 in early March, the world has come to a halt. All economic and non-economic activities (excluding essentials) were shut across the globe and the entire world population was advised to stay inside their homes to contain the spread of coronavirus. The financial impact of the closed world economy is already visible, for example - stock markets have tumbled drastically, with (almost) all large and small companies recording sharp drop in top line and many registering negative bottom line numbers in Q1 2020.
Nearly all industries across the globe have been significantly impacted and Metals and Mining industry is no exception. Metal prices have plummeted steeply in February and March 2020 due to abrupt and sharp decline in demand across all metals and minerals. However, iron ore prices behaved differently during this period. While all metal/commodity prices fell sharply during Q1 2020 as all major metal consuming industries were shut, iron ore prices were rather volatile over this period. Most metals closed the Q1 2020 in negative, but iron ore ended the first quarter with ~2.5% increase in prices.
The iron ore prices witnessed a significant decline in August 2019 (already covered in our previous blog) driven by seasonal decline in demand and supply recovery by iron ore majors. Since then, the prices have been fluctuating between USD 85 per MT to USD 96 per MT from August 2019 to January 2020 (pre Covid period). During Covid period (January 2020-April 2020) as well, iron ore prices were volatile within the same pre Covid range, but did not witness any major fall as seen in prices of other metals and minerals.
This buoyancy in iron ore prices was driven by the interplay between iron ore demand (mainly by China) and supply (primarily from Australia and Brazil). Due to global lockdown, all construction and manufacturing activities remained shut resulting in nominal demand for steel and hence, iron ore during Q1 2020. China, the biggest iron ore consumer (consuming nearly 57% of the global production), halted all construction activities and hence, its iron ore demand fell. However, its steel mills continued to operate (at low capacity) due to high cost of restarting idle plants, preventing the iron ore demand from falling to zero. Nonetheless, this demand decline was countered by supply concerns as Cyclone Damien hit Western Australia. This together with heavy rainfall in Brazil led to decline in shipment guidance by iron ore majors - Rio Tinto and BHP. Thus, supply issues shadowed the decline in iron ore demand and hence, cushioned the prices.
Further, the iron ore price outlook looks steady over the next few months, as China is expected to be fully back in business within a month or two. It has lifted the lockdown in Wuhan city (the epicenter of coronavirus outbreak) wherein most industries are expected to be operational soon, resulting in increase in steel and iron ore demand. Further, the Chinese governments’ commitment to provide stimulus to boost economic recovery is expected to give further support to steel and hence, iron ore demand and prices. For example - the government has planned to extend subsidies for purchases of electric vehicles and also increase construction of accompanying infrastructure, such as charging poles. Similarly, it has also approved the use of special bonds in funding slum redevelopment projects. All these initiatives, are forecasted to aid the steel and iron ore demand in the country.
The supply side, however, is a mixed bag. Though, major iron ore operations in Australia and Brazil are relatively less impacted by Covid 19 because of their highly automated and remote operations, yet, the nationwide lockdown in Brazil and South Africa will impact the seaborne supply of iron ore. Brazil’s estimated reduction in its seaborne supply in 2020 is around 18 million tonnes. Further, Australia, where the mining sector was already operational during February and March, is expected to continue production and shipment, however, to some extent this will be nullified by slow production and shipment by countries such as Brazil and South Africa. Thus, iron ore supply/shipment is expected to remain under stress by the end of 2020.
Hence, forecasted increase in Chinese demand coupled with constrained supply is expected to continue to support the iron ore prices during Q2 2020, however, the prices are forecasted to be under pressure starting H2 and particularly Q4 2020 as other countries (mainly Brazil and South Africa) are also expected revive their production and shipment numbers in the latter half of the year. Metals Market Index (MMi) also echoes this view - ‘China’s demand for iron ore will increase in the short term with blast furnace steelmakers stepping up operations, but the demand growth will be capped in the medium-to-long run amid the fast spread of the global coronavirus outbreak.’ As a consequence of this, it was noted that those factors, ‘together with expectations of rising supply, will keep iron ore prices under pressure.’ In the nutshell, prices of the metal are expected to stay steady with moderate optimism in the near-term though are likely to face pressure in the second half of the year.