Miner BHP Group hangs its hat on China’s reopening
Prices for iron ore and steel have both held fairly steady for the last couple of weeks, both having recovered from an April dip. This situation stands in contrast to the longer-term trend. In mid-May, iron prices stood at slightly above their February levels, while steel had fallen off 12.5%, continuing a longer pattern in which steel producers have been squeezed while the big iron ore miners have profited.
Earlier this year, officials at BHP Group, one of four big iron ore extractors, celebrated their company’s 2019 success, but cautioned that the spread of COVID-19 could depress iron ore demand projections for 2020 if the fallout extended beyond March. Here we are in May, with little if any abatement in the disease’s spread, yet the same company recently announced it had produced 3% more iron ore in the nine months ending March 31, 2020, and 7% more in the most recent quarter. In contrast to other publicly-traded companies in these uncertain times, many of which have pulled back their guidance for 2020 and beyond, BHP has held firm with its expectation that its 2020 iron ore production will hold steady with last year’s.
What accounts for BHP’s rosy outlook? It’s been widely reported of late that China is making strides towards reopening its economy, and particularly industrial production, including steel. The New York Times recently reported that Chinese “factories…are humming again, and even the air pollution is coming back.” Industrial plants in the United States are also planning to reopen.
China’s Domestic Production
S&P Global Platts recently reported that Chinese domestic steel production, which had fallen to under 190 million tons per annum (Mtpa) in February 2020, has since recovered to around 202 Mtpa. That’s still lower than the December 2019 figure of 211 Mtpa, but it shows improvement. Production in China of pig iron, an intermediate product made by smelting iron ore, is up 1.7% this year over last. Port outflows, according to the report, were 10% higher year-on-year from March through mid-April. All this explains why iron ore prices have “been resilient to the COVID-19 shock so far.”
BHP Group appears to be counting on China’s resurgence to fuel continued demand for iron ore. A recent company report noted that “industrial activity in China is showing signs of early recovery, aided by supportive credit and fiscal policy.” BHP sees steel production outside China narrowing by double digits in 2020 as long as steelmakers in Europe, the Americas, India, and Japan remain shut down. But that situation may also be changing.
“While demand in China has strengthened in recent weeks,” Chief Executive Officer Mike Henry said, in a recent call with analysts and journalists, “we expect other major economies, including the U.S., Europe, and India, to contract sharply in the June 2020 quarter.”
| Steel Imports by Ocean Carrier in MT | ||
| Oldendorff Carriers | 440,886.97 | 609,417.45 |
| Western Bulk Carriers AS | 276,990.53 | 638,113.29 |
| Pan Ocean Co Ltd | 195,076.07 | 173,055.83 |
| Sk Shipping Co Ltd | 133,493.43 | 335,583.58 |
| Toko Line | 115,925.97 | 150,713.39 |
| Clipper Steel Services Ltd | 107,770.60 | 209,875.66 |
| China Navigation Co Pte Ltd | 62,368.07 | - |
| Wagenborg Shipping BV | 46,975.31 | 356,093.74 |
| Saga Welco AS | 39,313.13 | 45,560.60 |
| Federal Atlantic Lakes Line | 30,006.98 | - |
| Others | 5,123,099.25 | 5,390,584.54 |
| Total | 6,571,906.31 | 7,908,998.08 |
| Source: Descartes-Datamyne | ||
But, Henry added, “The situation remains fluid.”
Indeed. Data and anecdotal information paint a murky picture for iron and steel this year. S&P Global Platts projects that China’s finished steel exports will drop sharply in May and June thanks to weak international demand, after increasing by 2.35% year on year in March and falling 27% year on year over January and February. Even with steel imports into China rising by 26.5% on the year in March, China’s net steel exports were down 1.64% on the year for that month, and down 21.33% on the year during the first quarter of 2020.
These numbers point to the fact that Chinese domestic demand recovered somewhat beginning in early March, when the country reported it had largely contained the virus. However, since the virus has spread around the world, export demand has been hit hard, leading to projections for weak May and June sales. That weakness may also be partially based on the assessment that Chinese steel has lost its price edge to competitors in Russia, Japan, and South Korea. On the other hand, if Chinese domestic demand continues to grow, which is by no means certain, steel imports into China could be boosted in the coming months.
Optimism in US
News out of the United States provides some cause for optimism for iron ore producers like BHP but also reasons for hedging. Automakers Ford and General Motors, both major consumers of steel, were both set to reopen most of their production facilities on May 18. Ford announced it would be working two, rather than three, shifts and recalling 12,000 auto workers. All of Ford’s North American production facilities have been closed since mid-March due to the COVID-19 pandemic.
The heavy equipment manufacturer CNH Industrial, manufacturer of Case and New Holland agricultural and construction equipment, closed its plants in North America on March 30 but has since also announced plans to reopen.
The shutdown of North American industry, not surprisingly, has depressed steel demand, as a result of which, nearly seven million tons per year of flat-rolled steel production have been idled. This year’s automobile sales projections in the U.S. are down over 30% since the beginning of 2020. Demand for aluminum, and its prices, has also been crushed. (see A distressed aluminum industry gets government help)
| Steel Imports by Country in MT | ||
| Country of Origin | Q1 2020 | Q1 2019 |
| Brazil | 1,993,652.84 | 1,972,614.69 |
| Canada | 696,386.15 | 408,084.93 |
| Japan | 688,094.98 | 391,059.75 |
| Russia | 416,814.66 | 454,345.16 |
| Trinidad & Tobago | 345,575.29 | 412,694.77 |
| Switzerland | 319,472.76 | 676,629.03 |
| South Korea | 291,247.70 | 283,294.20 |
| Mexico | 254,009.03 | 227,775.91 |
| Romania | 218,446.26 | 46,130.35 |
| Turkey | 142,694.14 | 162,967.75 |
| Others | 1,205,512.50 | 2,873,401.54 |
| Total | 6,571,906.31 | 7,908,998.08 |
| Source: Descartes-Datamyne | ||
ArcelorMittal and U.S. Steel reported collectively losing $1.5 billion in the first quarter. U.S. Steel announced that it plans on laying off several thousand employees nationwide. Nucor Corp., the biggest U.S. steelmaker, announced it would cut pay in lieu of laying off employees.
Whether or not U.S. industry opens and remains open, U.S. Steel will be cutting its capital spending this year by 14 percent, as a result of which, completion of several of the company’s strategic projects will be delayed. These actions, according to U.S. Steel President and CEO David B. Burritt, “make us stronger and enable us to weather the current situation.”
| US Steel Imports by Port in MT | ||
| U.S. Port | Q1 2020 | Q1 2019 |
| Mobile, AL | 1,222,851.99 | 1,348,093.76 |
| New Orleans, LA | 973,404.61 | 1,062,919.90 |
| Gramercy, LA | 935,296.48 | 680,998.44 |
| Corpus Christi, TX | 585,006.92 | 105,768.00 |
| Brownsville TX | 454,226.29 | 246,205.81 |
| Charleston, SC | 438,769.04 | 460,300.82 |
| Philadelphia, PA | 319,271.85 | 620,871.30 |
| Freeport, TX | 249,193.84 | 91,933.52 |
| Houston, TX | 232,915.29 | 917,527.20 |
| Vancouver, WA | 172,750.37 | 328,639.76 |
| Others | 988,219.63 | 2,045,739.57 |
| Total | 6,571,906.31 | 7,908,998.08 |
| Source: Descartes-Datamyne | ||
The reopening of industrial plants will have positive impact on steel demand and increased demand will influence requirements for iron ore, justifying BHP’s optimistic outlook. But the longer-term impact of the reopening of the U.S. economy is far from clear, as it may lead to new disease outbreaks and the eventual re-closure of production facilities. It remains to be seen whether BHP Group’s positive posture on iron ore demand comes about.
