Iron Ore’s Brazilian Rain Dance Looks Premature

(Bloomberg Opinion) -- Good news has been in short supply for iron-ore markets since China began shuttering swathes of the economy to contain the coronavirus outbreak. Prices gained after Vale SA offered a thin salve Tuesday, saying first-quarter output will be lower than previously anticipated because of heavy rains in Brazil. The market may be cheering a little too soon.

Iron-ore supply was supposed to return to normal this year, after 2019 was marked by disruptions including a fatal accident at one of Vale’s dams and a tropical cyclone in Australia. The Brazilian heavyweight and Rio Tinto Group, which vie to be the world’s biggest shipper of the steelmaking ingredient, both plan to increase production. The prospect of higher supply was reflected in Australia’s quarterly forecasts, published in December, which saw prices easing to $60 per metric ton by 2021 — more than a fifth below 2019’s elevated average.

The coronavirus epidemic has accelerated that trend by slashing demand in the world’s largest consumer of iron ore, pushing prices in Singapore below $80 by early February.

The picture isn’t encouraging. China’s return to work is proving gradual, even with official encouragement. Wuhan, the epicenter of the outbreak, accounts for about 2% of Chinese steel production, according to Bloomberg Intelligence. Some mills are working, but downstream demand has been hit across the country. Iron-ore stockpiles are building at China’s ports. Inventories of rebar, a benchmark for steel used in building work, stand at their highest level for early February since 2012. Carmakers also expect a production and sales hit: About 70% of dealers polled by the local industry association said earlier this week they had seen almost no customers since the end of January. Worse, the country’s role in global supply chains means there will be ripples.

All of this will still be fine in the long run if two things happen next: first, if supply eases alongside demand; second, if China regains its appetite fast, perhaps aided by stimulus.

The trouble for the market is that the current iron-ore price appears to have built in both assumptions. Optimism around the incremental number of virus cases, combined with Vale’s outlook, means Singapore futures are now down about 9% from when the epidemic began to look serious in mid-January. Domestic futures on the Dalian exchange have risen for two consecutive days, alongside stocks in steelmakers, cement companies and developers, encouraged by comments from President Xi Jinping.

The output picture does offer some hope. There is consolation in Vale’s rain-hit first quarter, and indeed minor disruption around Cyclone Damien in Australia. Vale’s full-year output target of 355 million tons involves assumptions around permits that could yet see delays. Yet Rio Tinto, BHP Group and others expect higher output in 2020. Chinese production may also be less sensitive to weaker prices than it once was, ticking higher despite the virus.

Demand is harder to forecast. There will be fits and starts, and the long incubation period for the novel coronavirus makes its path far harder to predict outside Wuhan and the surrounding province of Hubei. Supply chains will take months to repair even if the virus is contained.

The biggest unknown is the shape of China’s post-virus stimulus. Undoubtedly, it will lean on infrastructure, but that will take time to feed through. And don’t expect a repeat of the swift post-SARS recovery — in 2003, China was on an expansion path. That was also the case during the global financial crisis, when China splurged the equivalent of $586 billion on bridges and the like.

China in 2020 has to weigh the need to crank up growth, with the end of its current five year plan looming, against the risks of causing a further buildup of debt and creating property bubbles. Infrastructure and construction, which traditionally account for most of China’s steel and iron ore consumption, may benefit far less than in past crises.

Much will become clear after the legislature’s annual meeting in March (assuming it goes ahead on schedule). A sugar rush may well be on the way; it just may not be sweet enough.

To contact the author of this story: Clara Ferreira Marques at cferreirama@bloomberg.net

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.

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