China's Covid-19 Comeback Lifts Iron Ore -- Update

SYDNEY -- Even as steel production in the West stumbles because of the coronavirus pandemic, iron-ore prices are surging again as steelmakers in China keep output high to support the economic recovery there.

Iron ore climbed to $136.75 a metric ton on Wednesday, notching up its strongest price in seven years, according to data from S&P Global Platts. The value of steel's main ingredient, one of the world's most-traded commodities, has climbed 16% since the start of November, taking year-to-date gains to 49%.

It has been a difficult year for steelmakers in many parts of the world, as the Covid-19 pandemic buffeted economies, leading mills to scale back manufacturing this spring.

In the U.S., production is gradually increasing, but remains well below year-ago levels with steelmakers cautious about restarting more idled furnaces because of fragile demand and a surge in Covid-19 cases across the country.

U.S. steel output was down 15% year-over-year in October, and had fallen 18% over the first 10 months of this year, according to the World Steel Association.

It has been a similar story in the European Union, where steel output is also taking time to recover.

"Rising restrictions due to the resurgent coronavirus are creating further downside risks to steel demand" in those places, said Daniel Hynes, senior commodity strategist at Australia and New Zealand Banking Group Ltd.

But in China, where authorities waged an aggressive campaign in an effort to eradicate the virus, mills have been churning out steel at near-record rates -- even with the approach of winter, typically a weaker time for output as colder weather puts a brake on construction in the country's northern provinces.

Chinese crude steel output totaled 92.2 million tons in October, up 13% on the same month a year earlier. The China Iron and Steel Association recently forecast China's annual crude-steel output will top 1 billion tons in 2020, representing growth of up to 5% on year.

China's gross domestic product expanded by 4.9% in the third quarter from a year earlier, pushing the country's economy closer to its pre-coronavirus trajectory. The International Monetary Fund expects China's economy to expand by 1.9% in 2020, making it the only major economy likely to grow this year.

Fixed-asset investment -- which includes manufacturing, property and infrastructure investment, all big steel-using sectors -- is rising and a gauge of China's factory activity climbed to a three-year peak in November, new data showed Monday.

There have been some bright spots outside of China. In October, production climbed in Vietnam and Turkey, and edged higher in India, according to World Steel Association data.

Still, China accounted for roughly 58% of all steel produced globally in the first 10 months of the year, up from 54% in the same period of 2019, the data shows.

Chinese iron-ore futures, popular among speculators there, have also jumped sharply.

"The increase in [iron-ore] prices primarily reflects robust demand from China's infrastructure, property and manufacturing sectors," Commonwealth Bank of Australia analyst Vivek Dhar wrote in a client note on Monday. A slight fall in iron-ore stocks held at Chinese ports last week also helped, he said.

The profit margins of steel mills in China remain healthy because of an increase in steel prices there, which bodes well for iron ore's prospects, analysts say.

When it comes to demand, a winter slowdown is inevitable, said Morgan Stanley. But the bank projects iron-ore prices will stay strong headed into the new year, as demand is better than expected for this time of year.

Market sentiment has improved, Macquarie said in a Nov. 26 note, citing its own survey of Chinese steel mills and traders. But it isn't just demand driving prices, said the bank.

Buyers have been concerned about availability of supplies from Australia and Brazil, the two biggest mining hubs for the raw material.

In Brazil, iron-ore giant Vale SA has held back part of its production for its own inventory, while cautioning heavy rains from La NiƱa pose a threat to future production.

The biggest miners in Australia's remote Pilbara region, which accounts for more than half of all iron ore traded by sea, have been conducting maintenance work on their infrastructure, capping exports.

Still, thanks to strong prices, Australia's iron-ore exports hit a monthly record in terms of value in October. The boom in prices for materials including iron ore gives Australia's economic recovery an advantage compared with the rest of the world, said Paul Xiradis, chief investment officer and head of equities at investment fund Ausbil. Australia's economy has emerged from a recession, growing 3.3% in the third quarter, well above economists' expectations of roughly 2.5%, official data showed Wednesday.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com


  (END) Dow Jones Newswires
  12-02-20 0724ET
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