China's finished steel consumption in February could be up to 43 million mt lower than a year ago due to the coronavirus outbreak closing down construction and manufacturing activity, according to S&P Global Platts analysis. This equates to a reduction in pig iron consumption of up to 38 million mt.
Even if the spread of the virus stops accelerating in February, work at factories and construction sites is unlikely to resume to any great extent until February 24. In this case, finished steel consumption is likely to be dented by 31 million-43 million mt this month, equating to 28 million-38 million mt of pig iron. The pig iron demand loss is equivalent to around 47%-64% of last February's output of 60.08 million mt.
Migrant workers in most parts of China are due back at work on February 10, but will likely be made to undergo a further 14 days of quarantine to prevent outbreaks at factories and construction sites. This would put the actual return to work no earlier than February 24. Some migrant workers may also shun returning to cities where there is a rising number of infected people.
Market sources in China said there was also a shortage of protective masks, and manufacturing and construction companies are unlikely to secure enough masks for their workers -- so it may not be possible for them to fully resume operations.
China's Ministry of Industry and Information Technology estimates the country's production capacity at 20 million protective masks/day. China's construction industry alone has over 50 million employees, according to the National Bureau of Statistics. Masks need to be replaced at least every day.
One construction sector analyst said companies would need to fill in "very complicated paperwork" and receive clearance from higher authorities than usual before resuming site work - and these procedures will take much longer than usual.
Some construction companies have already delayed restarts to March 1. Shanxi's capital Taiyuan has ordered construction sites not to restart until March 2.
Given that work typically ramps up slowly after the Lunar New Year, all the additional factors this year could see full resumption delayed until early April.
As a result, steel demand looks set to take a big hit in the first quarter and the outlook for February's steel consumption loss could be on the conservative side.
Mills need to cut production
With steel demand set to be hit hard in February, oversupply in the steel market in February and March is inevitable unless mills cut production.
The China Iron & Steel Association reported that Chinese steel market inventories surged 35% from end December to 12.38 million mt on January 17. Market sources said depressed demand would see inventories surpass last year's peak of 22.32 million mt (also in February) by the end of this month.
In view of this, some Chinese mills have been bringing forward maintenance work, which is often a proxy for cutting production.
According to Platts estimates, the total pig iron output loss from mills that have announced maintenance work at blast furnaces will be around 2.2 million mt in February.
Many independent electric arc furnace steelmakers have postponed restarts from end January to after February 9; most have been idled since late December or early January for the Lunar New Year holidays.
If most of these EAFs restart from February 10, the total crude steel output loss from the EAF steelmakers will be around 1.5 million mt in February; lower than the 2.4 million mt EAF steel output loss in January.
While these losses are marginal, more integrated steel mills have begun to consider slowing down iron and steel production -- EAF steelmakers may have to keep their facilities idled beyond February 9 due to a lack of raw materials and delayed end-user demand. EAFs are higher cost than integrated mills and typically drop out first when steel prices tumble.
Market sources said many integrated mills held only 7-15 days of raw material inventories by the end of the Lunar New Year holidays (January 24-30). Sourcing raw materials may remain challenging even after February 10 due to road transport restrictions and delayed business restarts at raw material suppliers. This could force mills to cut production.
One mill source said his company would reduce steel output from mid-February as its warehouse was "too full to store any more finished steel products." He expected other mills would face similar issues if demand from manufacturing and construction does not resume significantly in coming weeks.
Some market watchers said given the delayed steel end-user demand, mills would either need to make more significant output cuts to support the steel market, or be forced into output cuts by oversupply.
This year marks the end of China's 13th five-year plan (2016-2020), which targeted average annual GDP growth of 6.5% during the period. As Q1 GDP growth is likely to be very low and potentially jeopardize that target, China's government is expected to announce more stimulus measures to offset the negative effect of the coronavirus outbreak on the economy.
China's service sector, which accounted for 54% of GDP in 2019, has been hit extremely hard by the outbreak. But it will be challenging to support the sector in Q2 as people will refrain from going outdoors as much as possible until the coronavirus is officially over. The SARS outbreak, starting in late 2002, ended in July 2003.
As a result, government stimulus is more likely to target fixed asset investment by loosening monetary and fiscal policies. China's property and infrastructure sectors, which account for about 55% of China's total steel consumption, are likely to gain support over the rest of the year.
The coronavirus outbreak will stimulate demand for some home appliances such as disinfection cabinets and air purifiers. As many people will be reluctant to use public transport for some time, low-end passenger car sales could also receive a boost from first-time buyers.
The China Passenger Car Association has estimated car sales will fall 25%-30% in January-February due to the outbreak, but said sales over March-December could deliver a recovery in year-on-year growth.
Steel market sources said it was difficult to predict Chinese steel market trends in 2020 as the situation was still evolving, but all agreed there would be far greater volatility this year than in 2019.
Source: S&P Platts