Brazil as Covid hotspot disrupting iron ore supply: Probis Securities

Brazil as Covid hotspot disrupting iron ore supply: Probis Securities

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We hope China and the US can get together and resolve the issues so that we can continue to trade, says Jonathan Barratt, CIO.

Demand seems to be recovering but we have only seen the economic and factory recovery limited to China for the moment. To what extent can this really support global steel markets?

It is quite an interesting question. At the moment, we have seen the demand being led by China with relatively good manufacturing numbers. We are also seeing terrific demand for iron ore. Remember, China imports or consumes 70% of sea born oil. So with iron ore at these levels, there is a flowthrough effect because they actually see demand in the economy. The key is whether the other parts of the sectors of the global economy can actually match that. But at the moment, China is leading and whilst they are leading, we have been quite optimistic; not just on iron ore but also steel and also some of the other base metal markets.

How have you read into the souring diplomatic relations between China and the United States? Countries like Australia and many other countries across the world are seeing the ramifications of this on the ferrous markets. Given that Australia is a big raw material supplier, do you see this playing out?
To tell you the truth, I am quite disappointed with how it has all panned out. We have got an open economy or global economy which has seen barriers. Australians also just raised their concern about the 80% tariff; so there are concerns there. So China is playing its hand and the US is playing its hand but at the end of the day, we have really got to see how all the major economies in the world see productivity occur.

At the end of the day, that will lead the market and the tit for tat and the political prowess between everyone is just more of a storm. But at the end of the day, productivity will lead through. And that is the way we see some of the commodity markets pickup. So yes, it is a concern and it is certainly a concern for Australia. We export a lot to China but hopefully the two big guys the US and China can get together, resolve some issues so that we can open borders and continue to trade.

Iron ore prices have already topped $100. We have got steel prices which are not moving with the same pace and that is largely because of the raw material supply issues. Could we be seeing a repeat of the whole compression in steel spreads going forward?
Generally that is not the case and I hope we see steel prices move higher. We do have an issue in terms of supply over iron ore and there are obviously coming out of Brazil in terms of Covid concerns and that is a real worry which is making the iron price go higher. When I look at the margins, we are seeing margins contract not just in steel but also in some of the other markets and that is a concern. But once again, there could be depression or suppression just due to how people are actually feeling about how robust any recovery will actually be and hopefully that margin will turn around and will become more profitable. But really once again, we have got to see how the economies can pick up or how much negative news is out there and how we can discount it into positive turns; then we will see those margins start to spread out there.

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