Kumba Iron Ore has joined the line of mining companies warning about possible disruption of commodity prices due to the coronavirus outbreak.

The mining giant, which reported a 69% jump in net profit for the year ended in December 2019 due to higher iron ore prices and higher demand for premium products, said the virus, dubbed Covid-19, was starting to affect commodity prices.

In 2019, the iron ore price averaged US$93 per tonne, the highest level since 2015 in US dollar terms, and the highest ever recorded in rand terms. Increased demand from China, responsible for a 5% increase in key iron production and 7% in crude steel production, as well as supply disruptions in Australia and Brazil, were among factors that drove the price increases.

However, after the virus outbreak, uncertainty on how it might affect demand from China is starting to affect the commodity prices, said Kumba CEO, Themba Mkhwanazi.

According to the World Health Organisation's update on Monday, February 17, there were 71 429 confirmed cases, including 2 162 new infections worldwide. Most of these - 70 635 - were in China, where 1 772 people have already died. Mkhwanazi said as the situation continues to shift rapidly, Kumba has become cautious about the short-term outlook for the industry, though it remains positive about the outlook in the long run.

"Over the past weeks this year, iron ore has remained around US$80 per tonne, clearly impacted by the coronavirus outbreak," he said.

Mkwhanazi, however, added that he does not expect the outbreak to affect Kumba's own production and sales targets for 2020. "Thus far, our sales have not been affected. At this point we don't expect to have to slow down production, even if steel production in China continues to be impacted well into the second quarter," he said.

He said if the crisis affects sales or production, Kumba will update the market.

BHP, which released its interim financial results on Tuesday, also issued a warning about market volatility created by the outbreak.

Iron ore price boost

The record level in rand prices of iron ore in 2019 helped Kumba lift its earnings before interest, taxes, depreciation and amortisation (ebitda) by 62% to R33.4 billion. The jump in ebitda, which is considered the most reliable indicator of operational efficiency in mining companies, also benefited from the rand falling 9% over the course of 2019, said Kumba CFO, Bothwell Mazarura.

The higher commodity prices, as well as higher prices for the high-quality lump products, more than compensated for the 2% decline in sales that the group recorded during the year. Roughly two-thirds of Kumba's sales consisted of this high-quality lump, for which buyers are paying premium prices. In 2019, the company recorded highest ever average price premium for lump.

China was again one of the drivers for this lump premium, as the country is trying to address air pollution challenges. This stronger focus on reducing air pollution bodes well for lump, as long as demand from that nation does not fall drastically because of the corona outbreak.