Iron ore shipments have continued strongly thus far in 2020, as is often the case for the shipping industry in the first quarter, but S&P Global Platts experts warned that the new coronavirus outbreak could soften sentiment in the foreseeable future as its impact on steel demand becomes clearer.

Since the iron ore market is about "cost plus freight," miners are trying to take advantage of cheaper rates to get the maximum number of their cargoes to China, which ensured that iron ore cargoes continued strongly in January, Platts Asia-Pacific Shipping & Freight Senior Managing Editor Pradeep Rajan told the Perth Metals Forum in Australia on Feb. 11.

Though the dam disaster at Vale SA's Feijao mine in January 2019 saw the company lose a significant level of export volumes in the first half of 2019, the situation improved during the third and fourth quarters with exports picking up, which helped the Capesize vessel market and supported freight levels.

Rajan said the International Maritime Organization's new shipping rules requiring vessels to burn marine fuels containing no more than 0.5% sulfur starting in 2020, saw "a lot more new deliveries of ships" thus far.

Supply-side pressure also contributed to that trend. While the "rush of ships" in the first quarter of 2020 was expected, Rajan said "the freight market has crashed, so Australian iron ore miners would be trying to push as much as possible at these low freight levels."

While major Australian iron ore producers BHP Group, Fortescue Metals Group Ltd. and Rio Tinto recently told S&P Global Market Intelligence that they were monitoring the situation, none of them reported any impact on iron ore shipments from the outbreak.

However, Rajan said effects of the outbreak would play out for at least the first two quarters of 2020, softening the demand for shipping, amid reports from Platts Steel Raw Materials Associate Editor Jun Kai Heng at the Perth Metals Forum that steel inventories were accumulating at a rate of up to 3 million tonnes a week in China.

Rajan noted that the annual steel production of Hubei, the epicenter of the virus, is 36 million tonnes, about 4% of China's total output, so "if that goes offline, it will have a huge impact" on the Capesize vessel market.

Hubei, a top industrial and logistics hub, accounts for 4.3% of China's GDP and 4.4% of industrial revenues, with 97 shipyards accounting for 5% of the total income in the domestic shipbuilding sector, according to Platts. The province is also a major player in the Chinese automobile manufacturing and spare parts sector.

Though Worldsteel data released Jan. 27 revealed "surprisingly strong" steel output from China in 2019, Platts Senior Managing Editor Paul Bartholomew told the forum that construction activity would not pick up until the end of March 2020 "at the earliest."

"Construction workers will be drifting back slowly — reluctantly in many cases — over the next week or so, but once they get back to their workplace, they're probably going to have to do another 14 days' quarantine [staying away from offices]," Bartholomew said.

The market also needs to consider the possibility of another spike in coronavirus cases once people have returned to work in China, Bartholomew added, and the issue could also be exacerbated by a reported shortage of protective breathing masks in China.

With all these factors in play, Bartholomew said up to 43 Mt of Chinese steel production could come out of the market. China produced 71 Mt of crude steel in February 2019, based on estimates by the China Iron and Steel Association reported by the World Steel Association.

Platts said in a Feb. 11 note that seaborne iron ore prices rallied that day amid hopes of Chinese logistics improving, coupled with easing concerns over the coronavirus's economic impact.

China's government had released several notifications to help migrant workers return to work safely and smoothly and said unnecessary road and highway blockades needed to be removed to improve delivery systems.

Platts cited an international trader as saying the declining number of new coronavirus cases had boosted market sentiment, while China issuing the first batch of local bonds Feb. 10 would also help the infrastructure investment growth rate to "pick up strongly."

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.