As ferrous prices climbed over the last few months, this report has commented on demand outlook into 2020 as well as inventory levels at different prices. With the spot market little changed over the last week near $600/st, buyers need to start deciding whether they are willing to replace their outbound inventory with higher priced material. We have repeatedly pointed to demand as a driver of buyers’ willingness to pay these prices, and the recent coronavirus scare may influence this outlook. While demand in the steel sector is difficult to gauge and forecast, some indicators may help develop a better understanding.

The Baltic Dry Index is shown below, indicating changes in global shipping costs for dry commodities (such as iron ore and steel), which is a barometer of global demand.

The significant drop in the Baltic Dry index was partially driven by iron ore prices declining from their extreme levels last summer. The emergence of the coronavirus in China has recently pressured the index and disrupted global financial markets. The largest impacts have been seen in energy and industrial metal prices due to expectations of decreasing demand for transportation and construction. With this demand indicator at low levels compared to the previous 10 years, it is reasonable to expect the coronavirus to cause weakness in domestic metals markets as well.

However, the domestic physical and future markets have not reacted throughout the scare.  Low import levels over the past 6 months have isolated the domestic market from global prices as more orders have shifted to domestic mills. This prevents demand shocks, like the current coronavirus outbreak, from influencing the steel market in the United States.

The duration and severity of the virus could be significantly more contained than the SARS outbreak, which reduced demand in 2003. If the coronavirus outbreak is short-lived and contained, financial markets will quickly revert to their pre-virus levels and the impact on current economic demand will be minimal. Any decline in demand due to the virus is likely to be delayed, shifting it into the future. Moreover, demand within the steel market is unlikely to be affected and buying decisions will be based on low on inventories that have to be restocked at the spot price. If this buying happens across the under inventoried supply chain at the same time, it will push prices higher for those who wait. The market is dynamic, and just because prices are available today, does not mean that they will be there tomorrow.