Inventories of steel at Chinese enterprises reached 21 million metric tons by March 10, far exceeding the previous monthly peak in 2015.
Photo: kim kyung-hoon/ReutersOil floats on water and iron sinks but, as the coronavirus panic has swamped global markets, a funny thing has happened: Oil has sunk while iron remains afloat. Brent crude and key automotive-metal palladium have both lost about half of their value this year and the S&P 500 is deep in a bear market, but steel prices are down only 10% this year. Iron ore prices are flat.
The bull case for iron and steel is simple: The Chinese housing market will rebound in April as pent-up demand is released and additional stimulus will give infrastructure a shot in the arm. China itself accounts for a full half of global steel demand. Iron-ore supply is also tight. Ore exports from five large miners, including top producers BHP, Vale and Rio Tinto, were down nearly 9% on the year in the first week of March, according to Platts.
The bear case, however, is also quite straightforward: Daily transactions in 30 major Chinese cities are still down nearly 60% on the year, according to Goldman Sachs. And since steel production has been less affected by the epidemic than labor-intensive construction, steel inventories have reached mountainous levels. Stockpiles at medium and large Chinese enterprises had reached 21 million metric tons by March 10—twice December levels and far exceeding the previous monthly peak in 2015. If home buyers don’t show up as planned in late March and April—or if construction companies can’t get funding to build—steel prices are nearly certain to fall sharply. A worrying precedent is copper: Inventories also spiked in February but managed to hold year-to-date price losses to around 10% until mid-March. Now prices are down around 25% year to date.
What is still unclear is how much financial damage Chinese households have sustained and how big Beijing’s stimulus measures will really be. Unemployment surged in the first two months of the year, but initial fears of catastrophic small-business failures might not be realized thanks to aggressive fiscal relief from authorities. Beijing in late February said small businesses could postpone payments into China’s social insurance system and its housing provident fund until midyear. A widely read, self-published essay by Chinese karaoke chain owner Wu Hai estimated that such payments amounted to 20% of his fixed costs. In aggregate, the payment delay will add around 550 billion yuan ($77.5 billion) to small enterprises’ cash flow in the first half, according to consultancy Gavekal Dragonomics.
As for other stimulus measures, policy makers have so far been restrained. The central bank’s preferred measure of total debt and equity finance outstanding has barely budged since the epidemic began: Growth in February stood at 10.7% from a year earlier, the same as the three months preceding. Government-bond issuance has been rapid, and a new round of infrastructure is in the pipeline. That will probably boost total infrastructure investment in 2020 only up to around 7% growth in 2020, though, estimates HSBC, from 3% in 2019. As recently as 2017, growth was running around 15%. Such a modest push seems unlikely to change the fortunes of the global metal sector or keep steel prices near current levels unless Chinese home buyers and builders show up in force this spring.
Whether they do or not ultimately depends on how many Chinese lose their jobs and whether they view this spring’s disaster as a temporary economic setback or the beginning of a period of markedly slower growth at home and abroad as the virus tightens its grip on Europe and the U.S.
Write to Nathaniel Taplin at nathaniel.taplin@wsj.com
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With Oil, Copper and Palladium Sinking, Can Steel Stay Afloat? - The Wall Street Journal
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