FOCUS: Coronavirus hammers Chinese auto sector demand for aluminium, steel

Demand for aluminium and steel coil in China has come under strain while the novel coronavirus (2019-nCoV) crisis has allowed the gears of the country’s automotive sector to grind to a halt.

Many manufacturing plants across China - including those in the automotive segment - have paused operations in the past two weeks to February 12 after the government extended workers’ Lunar New Year holiday to restrict the virus spread.
Chinese parts manufacturers are vital suppliers to automotive plants both in China and in other key Asian markets.
A lack of components from China led South Korean carmakers such as Hyundai, Kia and Ssangyong to halt production last week, while Japan’s Nissan also announced it would stop output at its Kyushu plant on February 14 and February 17 due to a lack of Chinese parts.
The stark slowdown in demand from China’s automotive sector is one factor pushing down prices for steel coil and suffocating activity in aluminium alloy markets in recent weeks. The sluggish restart of operations at plants means demand for these materials is unlikely to improve anytime soon, sources told Fastmarkets.
Fastmarkets’ daily price assessment for steel hot-rolled coil (HRC) domestic, ex-whs Eastern China was 3,510-3,520 yuan ($503-505) per tonne ex works on February 12, down by 395 yuan per tonne since the start of the year.
Prices paid for ADC12, an aluminium alloy commonly used in motor vehicle production, have stagnated on coronavirus concerns.
Fastmarkets' latest price assessment for aluminium ingot ADC 12 spot (MJP), cfr Japan was stable week on week at $1,580-1610 per tonne on February 12.
While Fastmarkets’ assessment of the aluminium ingot ADC 12, exw dp China price was at 14,100-14,800 yuan per tonne on Wednesday February 12, unchanged from the week prior - and since January 15 - on few transactions completed in the market.
Motor vehicle exports from Japan to China have already been falling and could look set to fall further now that China is closing its borders and limiting contact with the outside world, Japanese market participants said.
"Vehicle production has been falling and with the coronavirus affecting demand, manufacturing will fall further and so will consumption of ADC 12," an aluminium trader said.
China’s auto sector remains in a jam
Chinese state media announced that multiple manufacturing companies - including those operating in the automotive sector - returned to work on February 10.
Output at factories remains lethargic due to a lack of laborers available to work due to quarantines around the coronavirus, sources said. In Shanghai, for example, people entering the city from certain designated areas elsewhere in the country must isolate themselves for 14 days.
“Most car plants do not plan to run production this week. They don’t have enough operators to start production, and this is a major issue for suppliers,” one automotive source told Fastmarkets.
“We normally only keep 12 hours of inventory in our plant and our coil supplier delivers just in time. We cancelled a lot of [orders],” the automotive-sector source said, adding that his automotive plant would only return to operation on February 24.
“We haven’t started working yet and companies in the automotive [supply chain] have delayed resuming work to February 17 due to restricted transportation in many Chinese cities," an ADC 12 producer in south China on February 12.
“If there was one confirmed infection case in the plant, it will lead to manufacturing lines’ paralysis and may lead to the company’s closure. So, car producers prefer to restart later once the situation is improving,” the ADC12 producer added.
Although many workers have returned to their day jobs, several are still working from home, one Chinese steel trader said.
“Working from home is fine in a trading company but not for a manufacturer, and manufacturers now have a lack of labor,” the steel trading source said.
A steel producer source told Fastmarkets on Monday that his downstream customers had not returned to operations yet, including automotive producers.
A machinery producing source said that their company had resumed work on Monday but that production volumes will not recover quickly, given that workers re-entering Shanghai after the Lunar New Year holiday in other provinces must be quarantined for 14 days before returning to work.
A slowdown of automotive sales is another concern among market participants, given China’s challenging economic predicament.
“I'm quite bearish on aluminium prices now because motor vehicle sales are just going to continue falling, there is no fundamental reason for demand to rise now,” a second aluminium trader said.
The slump in the Chinese automotive sector comes at a particularly challenging time for the sector, with the country’s motor vehicle production down 8% year on year in 2019 to 25.53 million units, according to the country’s National Bureau of Statistics (NBS).
Chinese logistics remain challenging
Mills are looking at trying to export more material now that domestic demand for finished aluminium products is depressed, a second Chinese steel trader said.
One problem is with logistics’ issues, with quarantine rules restricting the free movement of truck drivers in key areas such as Shanghai.
“The transportation restrictions have affected our logistics for material delivery, which almost tripled our delivery cost compared with before China’s Lunar New Year,” an aluminium sheet producer in northern China said on February 12.
Road issues mean that only state-owned steel mills with their own rail capabilities are able to easily receive raw materials or move finished products to the ports, the second steel trader said.
Fastmarkets’ weekly price assessment for steel cold-rolled coil export, fob China was $520-525 per tonne on Tuesday February 11, down by $15-20 per tonne from $535-545 per tonne a week ago.
Once material has arrived at the port, operations remain slower than usual due to reduced numbers of employees, temperature checks on workers and cargo bottlenecks, one shipping company said on Tuesday, adding that operations are smoother than last week.
The good news for exporters is that once material is loaded to a vessel, the recent dive in global freight rates means sea transport has become more affordable.
The capesize freight rate from Brazil’s Tubarao to China’s Qingdao port was at $13.60 per tonne on February 10, one major freight provider said, down by more than a quarter since January 1.
Miranda Song in Shanghai, and Ken Lee Kiat in Singapore, contributed to this article.

Karen Ng

karen.ng@fastmarkets.com

Hui Li

hui.li@fastmarkets.com

Published

Karen Ng

Hui Li

February 12, 2020

14:10 GMT

Singapore, Shanghai