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By Clyde Russell
LAUNCESTON, Australia, Jan 23 (Reuters) - The risk to commodity demand from the spread of a new flu-like virus in China has so far focused on crude oil and related products such as jet fuel, but the iron ore and steel markets will also be keeping a nervous watching brief.
The effective quarantining of Wuhan, a city of 11 million people where the new strain of coronavirus emerged, sounds like a major step to combat the virus which has so far killed 17 people and infected several hundred more.
That the move comes on the eve of the Lunar New Year holidays, which typically see millions of Chinese travel to visit family and friends, underlines the disease’s danger.
It will, however, only become a problem for iron ore and steel demand if it spreads far enough to make an impact on China’s construction season, which tends to start in earnest after the Lunar New Year break.
It’s still way too early to make an assessment that construction activity may be crimped by the coronavirus, but it is another risk factor for the outlook for iron ore and steel demand.
Both iron ore and steel enjoyed a robust 2019. Iron ore prices reached a five-year high after supply was reduced in the first half because of mine closures in Brazil in the wake of a fatal dam collapse, and a tropical cyclone in Australia.
The price of benchmark 62% iron ore MT-IO-QIN62=ARG, as assessed by commodity price reporting agency Argus, reached a peak of $125.20 a tonne in July last year amid the supply crunch, before retreating to a low of $78.15 by mid-November.
If there is a historical pattern to spot iron ore prices in China, it is one of a rally ahead of winter as steel mills build inventories for the start of the spring construction season, followed by a decline until a usually more modest summer pick-up.
So far this northern hemisphere winter, 62% iron ore has gained 22% from its Nov. 11 low up to the close of $95.60 on Wednesday.
This is about half of the 41% surge the steel-making ingredient enjoyed last winter, when it went from $64.60 a tonne in November 2018 to a peak of $90.75 in early February 2019.
This implies that the market is already somewhat more cautious about the outlook for iron ore and Chinese steel demand.
China’s steel output came within a whisker of the 1 billion tonnes mark in 2019, coming in at a record 996.34 million tonnes, up 8.3% from 2018, according to official statistics.
The industry was boosted by strong margins on the back of increased infrastructure and building construction as Beijing boosted stimulus measures to counter the economic drag of the protracted trade dispute with the United States.
It may be the case that the ‘Phase 1’ trade truce signed by the two countries this month actually cuts the amount of spending Beijing will pump into the economy in 2020, which may act as a drag on steel demand.
Another factor to watch is the ongoing weakness in China’s vehicle sales, which dropped 8.2% in 2019 from the prior year, and are forecast by the country’s automobile manufacturers’ association to slip another 2% this year.
Benchmark steel rebar futures in Shanghai are flat so far this year, ending at 3,521 yuan ($510) a tonne on Wednesday. That’s little changed from 3,558 yuan at the end of last year, but also 3.5% weaker than the eight-year high of 3,647 yuan reached on July 1 last year.
There already appears to be a fair degree of caution being built into the price of iron ore and steel in China, which is currently justified given the concern over the spread of the new virus and a somewhat softer outlook for the key construction and auto sectors. (Editing by Kenneth Maxwell)