It is impossible to predict the path of a global pandemic. After originating in China in early 2020, COVID-19 began spreading to nearly every corner of the globe—causing major disruptions to economies that were unprepared.
According to some reports, even prior to COVID-19, there was consensus that the world was not prepared for global health threats. As the path of COVID-19 expands, is it possible to foresee the impact that potential future stay-at-home orders could have on global business?
Let’s look at the rise in confirmed cases of COVID-19 in Brazil and its potential impact on the metals market. As of July 16, there have been more than 1.9 million confirmed cases of COVID-19 in Brazil, the second-most in the world behind the United States. According to the Ministry of Health, during a two-day stretch in June, roughly 46,860 new infections were reported.
This is notable to the production of steel because Brazil is one of the largest miners and producers of iron ore in the world. Iron ore is one of the raw materials used for producing carbon steel.
A Key Ingredient
HRC (hot roll coil) is the principal finished steel form in the global steel industry and an important raw material for manufacturers. It is a critical material that requires accurate and timely spot pricing and analysis, from the cost of the raw material to global trade agreements. This all ultimately impacts the pricing of carbon steel.
Carbon begins in the raw state of iron ore, scrap, coking coal, and natural gas. The price of these resources is influenced by the producing countries and traded on exchanges like CME. As the wave of COVID-19 outbreaks in Brazil, along with other countries in South America, begin to spike, it could have an impact on the price of iron ore, and thus the final price of carbon.
Here is how it all comes together:
Capacity utilization: Amid the outbreak of COVID-19 earlier in the year, U.S. mills took asset utilization levels down from 80-85% to about 50%. That means that of the usable production capacity, only 50% was running. This was done so that they could meet the supply as demand levels contracted.
Furnaces: Of that production capacity that went offline, the bulk was with mills that use Basic Oxygen Furnaces (BOFs), which use iron ore. Conversely, Electric Arc Furnaces (EAFs) use scrap. While mills have the ability to shift their raw ingredient mixes, price deviations in iron ore could mean that cost structures are vastly different between the two types of mills, with margins tighter at BOFs as opposed to cost potential cost reductions at EAFs.
Demand: Simultaneously manufacturing and demolition actively began to decline, which meant less scrap was being produced. Thus EAFs, which run on scrap, could not run as efficiently as desired.
Price: Since March, the price of iron ore has risen from roughly $80/ton to $100/ton. This has been led by China, which produces 95% of its steel from iron ore. As manufacturers in China began coming back online in recent months, this pushed iron ore prices higher.
This all culminates with the question of whether the rise in COVID-19 cases across South America, particularly in heavy iron-ore mining countries like Brazil, could ultimately put greater pressure on the price of iron ore. Only time will tell.