Dr Baris Bekir Çiftçi

Head, Strategic Initiatives, worldsteel

30 April 2020

Steelmaking materials, namely iron ore, metallurgical coal and ferrous scrap, are some of the biggest commodities in the world in terms of volume of production, consumption and transportation.

As steelmakers around the world operate at reduced capacity in response to the demand shock in the construction, mechanical equipment, automotive and other downstream sectors, here I focus on the impact of the COVID-19 pandemic on the steel industry’s upstream sectors.

Australian iron ore and metallurgical coal production largely unaffected

It is quite common to see just one country or a very small number of countries dominate global supply in the commodities markets. For example, OPEC countries, together with Russia and the US, dominate global crude oil supply. Steelmaking materials are no exception.

Australia is by far the main supplier of iron ore and metallurgical coal, with exports of both accounting for about 60% of the global seaborne supply in 2019.

Australia is therefore positioned at the heart of the global steel value chain and a major disruption in Australian supply would have a disastrous impact on most steelmakers and their customers all around the world.

Fortunately, Australian iron ore and metallurgical coal mining operations and logistics have proved quite resilient during the COVID-19 pandemic so far.

Indeed, Australia has even succeeded in increasing its iron ore supply to seaborne markets. Iron ore exports from Australia’s Port Headland, the world’s largest bulk export port, hit a record high level in March 2020

Coal throughput statistics for the Hay Point and Dalrymple Bay Coal Terminals, which together account for more than half of Australia’s metallurgical coal exports, suggest Australian coal production and logistics chains have remained largely unaffected too.

The quarterly production figures for Australia’s largest metallurgical coal producer, BHP, which accounts for more than half of Australia’s hard coking coal supply, suggest the same.

Australian iron ore and coal mining operations and the corresponding logistics are automated to a very great extent, which likely explains their resilience.

Brazilian iron ore production resilient, but risks may stall operations

Major iron ore mining and logistics operations in Brazil, the second biggest seaborne iron ore supplier in the world, have so far not seen significant damage from the COVID-19 pandemic either.

However, Vale, the biggest iron ore producer both globally and in Brazil, has warned that the company may suffer from workforce-related operational difficulties and may need to adopt contingency measures depending on how the epidemic will unfold in Brazil.

The company also stated that the pandemic has caused delays in the ongoing authorisation processes for the reopening of its iron ore mining and processing operations that were halted in the aftermath of the Brumadinho iron ore tailings dam disaster last year.

Mixed picture for iron ore and metallurgical coal production elsewhere

Mining has been included in the list of essential industries in the US and has been allowed to continue operating during lockdowns. The US was the second biggest seaborne metallurgical coal supplier in 2019 and meets most of its iron ore requirements domestically.

Nevertheless, many iron ore and coal mines in the US have been idled in the face of economic downturns caused by the COVID-19 pandemic in the US and in the country’s traditional coal exports markets, Europe, India, Japan, Brazil and Korea.

The pandemic has caused much greater difficulties for mining operations in some of the smaller countries supplying steelmaking materials.

Nation-wide lockdowns in South Africa and India and operating restrictions for mines in some states in Canada have caused considerable reductions in mining output.

These three countries represented about 10% of global seaborne iron ore supply in 2019 and hence the aggregate impact of these disruptions on global supply is significant.

However, restrictions are being relaxed in some of these cases and major mining companies have been able to operate at reduced rates with lower staffing levels.

The nation-wide lockdown in India will probably have a bigger impact on the demand side of the seaborne metallurgical coal market as India is one of the biggest importers of the commodity.

What is generally true for miners everywhere is that the COVID-19 pandemic has caused delays/cancellations in exploration activities and investment plans as companies aim to secure cash for operational expenses during the crisis period.

Scrap seriously impacted

Scrap generation and collection have been considerably impacted by the COVID-19 pandemic. Industrial scrap generation has plunged as activity has come to a halt in some steel using sectors and slowed down considerably in others.

Obsolete scrap (scrap from a steel product that has come to the end of its life) generation has also dropped sharply as consumers delay purchases of new domestic appliances or cars, businesses delay investments, and demolition activities are slowed down or postponed.

Meanwhile, shutdowns and social isolation measures have complicated scrap collection. Although this is concerning, we expect to see a gradual improvement as the restrictions are phased out, particularly in those developed economies that have been the traditional scrap suppliers to the rest of the world.

Uncertainties persist as lockdown measures ease

Although life in China has largely returned to normal and the situation becomes gradually less severe in Europe, we should note that the awaited recovery here and elsewhere is surrounded with considerable uncertainties and we should expect to see severe volatility in steelmaking materials markets along the recovery path.

There is still considerable uncertainty on how long the emergency will last and how far the outbreak will stretch across the globe. Potential mismatches between the pace of recovery in different regions and different sectors are therefore likely to contribute to uncertainty and volatility in commodities markets for some time.

Lastly, we should note that we must assume that a shock of this scale will have some long-lasting if not permanent impact on economic and social life and hence on the global steel value chain, but what these will remain to be seen.