Iron ore prices are down but is demand recovery around the corner?
Iron ore prices have tumbled on concerns over the impact of the coronavirus outbreak and the consequences for China’s economy.
The benchmark S&P Global Platts 62 per cent iron ore price shed about $US10 since the Chinese New Year holiday to hit $US83.05 ($123.29) per dry metric tonne on Tuesday.
While the fall had been largely expected since trading resumed last week, it nonetheless raised concerns about how it would impact the Australian economy, particularly Western Australia’s, which could receive a big hit to its iron ore revenue.
Paul Bartholomew, head of metals news & insight, Asia-Pacific for S&P Global Platts, told Stockhead that the price drop was due to a combination of the lack of trading activity and the negative sentiment around the coronavirus.
He noted that while logistics issues had been worth watching, they appeared to have improved this week.
“Essentially, some of the truck transport is pretty thin at the moment because either the drivers are still on holiday or quarantined,” he said.
“There were also bans on collecting supplies and cargoes from the ports, though we understand some of that has been loosened now.”
China had imposed restrictions on the movement of people and goods in the wake of the coronavirus outbreak and had also extended the holiday period until February 10.
Measures taken to contain the virus spread could also slow the loading and discharge rate of raw materials.
“We are not expecting demand pickup until probably end of March, as it typically takes a couple of weeks after the Chinese New Year to get back to normal operating rates, and obviously with the stuff going around the coronoavirus, that is going to push it back possibly a month,” Bartholomew explained.
However, it is not all doom and gloom.
The timing of the coronavirus outbreak happening during the Chinese New Year could actually work out work out better than if it had occurred at any other time of the year.
“I guess the one thing is that all this is happening during a seasonally slow time of the year anyway,” Bartholomew explained.
“So perhaps some of the downside is going to be absorbed by the fact that February is always a quiet month.”
He added that if things didn’t worsen, activity could start picking up from the end of February to March.
“When the recovery does come, it will be quite swift and there will be a big pickup,” he noted.
“There is going to be a lot of pent-up demand, then you will see mills flying into action and restocking.
“We expect to see the Chinese government put a bit of stimulus into the economy, a lot of that will find its way into probably infrastructure and property construction and other types of fixed asset investment.”
China could also ramp up its stimulus programs to counter the impact of the coronavirus and possibly meet any targets for the final year of its 13th five-year plan.
“It does take a while to actually generate demand with these projects, it doesn’t happen overnight there is always going to be a lag time,” Bartholomew added.
The iron ore players at the junior end of the market haven’t fared so well over the past month, with their share prices having shed between 4 per cent and 25 per cent of their value.
Here’s a list of small cap ASX iron ore companies:
The newest iron ore entrant to the ASX, Macarthur Minerals (ASX:MIO), was down 4 per cent. The company is exploring for iron ore at its Lake Giles project near Kalgoorlie in Western Australia.
The biggest fall was witnessed by Legacy Iron Ore, which operates the Mt Bevan iron ore joint venture in the Yilgarn region of WA.