Column: Steel, iron ore tread narrow path between China and Russia

Workers wearing face masks work next to a furnace at a steel plant in Hangzhou, Zhejiang province, China February 24, 2020. China Daily via REUTERS

LAUNCESTON, Australia, March 25 (Reuters) - Asia's steel and iron ore markets are trying to thread the needle between China's coronavirus lockdowns and the likely loss of exports from Russia and Ukraine.

The first factor is bearish for prices, as China's steel output may fall on lockdowns in some producing areas, such as Tangshan, as well as the potential hit to economic growth.

The second could be both bearish and bullish, depending on how the conflict between Russia and Ukraine plays out.

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Both are major steel exporters, with Russia shipping about 28 million tonnes in recent years, to rank just behind Japan, but some distance behind number one China, which exported 52.63 million tonnes of steel products in 2021, official data show.

Ukraine exports about 15 million tonnes of steel a year, ranking it eighth, and it is also the world's fifth-biggest shipper of iron ore, although its volumes are small compared to the top exporters, Australia and Brazil.

Ukraine exported 21.26 million tonnes of iron ore in 2021, according to Refinitiv research, or about 2.5% of the 884 million tonnes that Australia shipped.

Since Russia's invasion of neighbouring Ukraine on Feb. 24, international buyers have been pulling back from purchases of its steel, although it is likely to take several months before the full impact of the self-sanctioning becomes apparent.

Ukrainian shipments are also affected, given the proximity of fighting to some major ports, meaning ship owners, insurers and traders will be reluctant to lift cargoes.

This would appear bullish for prices of both iron ore and steel, given the likely tightening of supply, especially in Europe, which bought most of the supplies from Russia and Ukraine.

But it may also result in more Russian steel being diverted to Asia, as exporters seek new markets for products no longer being purchased by Europeans.

This may roil Asia's steel markets, especially if Russian products are offered at steep discounts to those from the region's more usual suppliers, China, India, Japan and South Korea.

China steel output vs rebar price

Conversely, Asian exporters may find new opportunities to ship to Europe, especially if European steel mills are constrained by rising energy costs from boosting their own output.

Overall, the impact of Russia's likely exclusion from much of Europe's steel market will be felt in Asia as well, and a re-aligning of trade flows is expected.

Much will also depend on China's future steel demand, which in turn will be determined by how long the current lockdowns last, and whether higher stimulus spending follows, as Beijing seeks to rebuild economic momentum.

CHINA STEEL TO REBOUND?

China's crude steel output dropped 10% in the first two months of the year to 157.96 million tonnes from 174.99 million in the corresponding 2021 period, official data show.

Production curbs to lower pollution ahead of the Beijing Winter Olympics are part of the reason for lower output, but high prices for iron ore and coking coal would also have limited mills' efforts to run at high capacity.

China's exports of steel products also slipped in the first two months, coming in at 8.23 million tonnes, down 18.8% from the same period in 2021, according to customs data.

But a soft start to the year for China's steel sector doesn't mean the rest of the year will follow the same pattern, and there are already some signs of rising output.

The China Iron and Steel Association has said crude steel production rose 4.61% in the 10 days to March 20 from the preceding 10-day period.

Amid the uncertain outlook for both China's steel sector and the impact of Russia's invasion of Ukraine, iron ore and steel markets have traded cautiously, with few of the wild price swings seen in crude and natural gas markets.

Benchmark 62% iron ore for delivery to north China , as assessed by commodity price reporting agency Argus, ended at $146.40 a tonne on Thursday, up slightly from its $137.20 close on Feb. 23, the day before Russia's attack.

Steel rebar futures in Shanghai closed at 4,976 yuan ($782) a tonne on Thursday, up from 4,775 yuan on Feb. 23.

The modest price gains for iron ore and steel in Asia reflect a probable market bias that the bullish factors of China stimulus and the loss of Russian and Ukrainian exports will eventually win out.

GRAPHIC-China steel output vs rebar price: https://tmsnrt.rs/3Dbl8M7

The opinions expressed here are those of the author, a columnist for Reuters.

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Editing by Clarence Fernandez

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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Clyde Russell is Asia Commodities and Energy Columnist at Reuters. He has been a journalist and editor for 33 years covering everything from wars in Africa to the resources boom and its current struggles. Born in Glasgow, he has lived in Johannesburg, Sydney, Singapore and now splits his time between Tasmania and Asia. He writes about trends in commodity and energy markets, with a particular focus on China. Before becoming a financial journalist in 1996, Clyde covered civil wars in Angola, Mozambique and other African hotspots for Agence-France Presse.