Coronavirus impacts base metals market

The coronavirus (COVID-19) outbreak continues to spread, with figures from the World Health Organization putting the number of infected people in China at 77,262 and the number of deaths in the country at 2,595, including two in Hong Kong.

Another 2,069 cases and 23 deaths have been reported in 29 other countries, with eight deaths reported in Iran, seven in South Korea, two in Italy, and one in the Philippines, Japan and France, according to figures from WHO on Feb. 24.

However, many believe that the Chinese government continues to underreport the number of people infected, with the actual number significantly higher at over 400,000.

As the virus continues to spread, not only is the human toll likely to get worse before it gets better, but as Chinese businesses are forced to either shut down or limit their operations due to labour shortages and interruptions to supply chains, the Chinese economy and economies the world over will also take time to recover.

The health emergency could delay about US$11 billion worth of planned Chinese nickel investments in Indonesia, the Financial Times reported, quoting Luhu Pandjaitan, a minister in charge of maritime affairs and investment.

Wenyu Yao, a senior commodity strategist at ING in London, says prices for industrial metals have dropped on average by about 10% since the end of January. “Because of the massive disruption to logistics and transportation at the local level, not only are copper, zinc and aluminum smelters running short of raw materials, but they are also experiencing difficulties in transporting finished product,” she says in a telephone interview.

A combination of quarantine protocols, transport restrictions, (around 760 million people are currently under some type of travel restriction according to the New York Times), staff shortages, and a government-mandated staged return to work, is already making February an economic write-off for China.

The outbreak also occurred towards the end of the Chinese New Year celebrations, when many workers were away from their homes and so have not been able to return to their places of work, forcing many downstream producers to suspend operations.

“I don’t think anybody is in panic mode at the moment about the Chinese economy,” says Pierre Vaillancourt, vice president and senior mining analyst at Haywood Securities in Toronto, “but there is a much more muted outlook, particularly for the first half of the year.”

Given that China is the world’s largest consumer of metals, it’s no surprise that the global metals market is reacting to a slowdown in Chinese industrial activity.

“The price impact has been seen primarily for copper and nickel,” says ING’s Yao. “Many investors were bullish on these metals before the outbreak but have now been forced to wind back their positions, which has caused a fall in their prices.”

According to Scotiabank, at the end of January, the nickel price has fallen to its lowest level for six months, with the copper price dropping well over 10% since December. Zinc prices also continue to fall, albeit at a more moderate rate.

Although prices now appear to be stabilizing, near-term price movements for base metals will continue to be influenced by the impact of the outbreak on China’s economic activity.

Furthermore, because buyers prefer to visit physical shops for products like cars and goods, the closure of retail outlets is also negatively impacting sales. Online sales are also suffering due to a shortage of delivery staff.

The lockdown is likely to remain in place for the remainder of February and possibly until mid to late March, further impacting the Chinese economy, with the knock-on effects already being felt globally.

Moody’s Investors Service has already revised down its global GDP forecast for China, lowering it from 5.8% to 5.2%, and expects the G-20 economies to collectively grow at 2.4% in 2020, down from 2.6% in 2019.

“Because of the widespread disruption from the outbreak, we don’t have much macroeconomic data coming out of China,” says Yao. “But our economists in Asia have already downgraded their GDP forecast for China from 5.6% to 5.4% for 2020, based on the assumption that the virus is contained in the second quarter.”

Also, Chinese mines often employ significant numbers of trained miners and plant operators from coastal provinces such as Jiangsu and Zhejiang. The 14-day quarantine period for workers crossing provincial borders is now leading to a bottleneck throughout the metals and mining industry, further exacerbating the economic impacts.

Wood Mackenzie has reported that at least half of the country’s mines are on extended shutdown, and of those that are open, most are not operating at full capacity.

China is a crucial player in the copper market and accounts for more than half of global demand.

“Although there is an expectation that the outbreak is unlikely to impact either copper supply or demand significantly,” says Haywood’s Vaillancourt, “the copper price is often a bellwether for the state of the global economy, and it’s taking a hit at the moment.”

Because copper is one of the most widely used metals in the world, demand for copper is often considered a reliable indicator of the health of the global economy.

The London Metal Exchange three-month copper price fell from US$6,300 per tonne at the start of 2020 to US$5,700 per tonne at the end of January.

Daye Nonferrous Metals Group, located in Hubei province, where the epidemic originated, has reduced its copper production capacity, Fast Markets reported on Feb. 5, while Guangxi Nanguo Copper, although not a significant copper producer, has declared a “force majeure,” suspending its purchase of copper concentrates from suppliers due to the outbreak.

Hubei is also China’s single largest auto-galvanized sheet-producing region, and an extended shutdown in demand is likely to put pressure on zinc prices.

Henan Yuguang Gold and Lead in Henan province, which borders Hubei, has already shuttered half of its 300,000 tonne-per-year zinc production capacity due to the difficulty of moving large quantities of sulphuric acid, a by-product of the process, Reuters reported on Feb. 13. Declining demand for zinc used to galvanize steel was another reason for cutting back production, the news agency said.

Zinc smelters typically produce about 1.8 tonnes of sulphuric acid for every tonne of refined zinc. Although some acid is used in the production process, smelters have limited capacity to store acid, so the bulk is sent to chemical and fertilizer manufacturers.

However, because trucks are used for transporting the acid, labour shortages and movement restrictions have limited the ability of smelters like Henan Yuguang Gold and Lead to dispose of it. Combined with shrinking demand for the metal due to ongoing quarantines and lockdowns, the company had no choice but to limit its production, Reuters reported.

Reductions in zinc output from Chinese smelters will not only affect the zinc market in China but will have a knock-on effect on the rest of the world.

As China’s demand for imported concentrates drops, the world’s concentrate supplies will be driven further into surplus, placing upward pressure on zinc spot treatment charges (TCs). Compared with January, TCs are now US$10 per tonne higher, at around US$320 per tonne.

Primary lead producers are facing a similar predicament to zinc smelters, as limitations on acid storage and, over time, restricted access to concentrate, will lower production levels. And with much of China now immobilized, secondary lead smelters are also suffering from restrictions on the movement of scrap batteries, the primary feedstock for lead recyclers.

In the absence of an adequate supply of refined lead, battery manufacturing could slow or come to a halt. Since the outbreak, stocks of lead held by companies on the Shanghai Futures Exchange have dropped by over a third as consumers scramble for the material, according to Wood Mackenzie.

The reduced availability of lead and zinc, and other metals is being felt by companies in China and internationally.

China’s Association of Automobile Manufacturers (CAAM), for instance, has estimated that the outbreak will disrupt the production of over 1 million vehicles. In its latest assessment, CAAM estimates that of the 183 automotive manufacturers it tracks, only 59 had resumed production as of Feb. 12. In addition, only 20% of the 2,895 dealers across China had reopened, as of Feb. 14, according to China’s Automobile Dealers Association.

Plants owned by Honda, GM, Nissan, and the PSA group of France operating in Hubei — one of China’s critical automotive component manufacturing regions — are currently closed until further notice. Hyundai is closing factories in South Korea, and Fiat Chrysler announced that one of its European plants might have to close due to a shortage of critical parts.

Any slowdown in industrial activity will severely impact companies with manufacturing facilities in China.

On Feb. 17, Apple issued a revenue warning for the current quarter as a lack of workers at its iPhone manufacturing facilities in China has led to a decrease in output.

China is also Apple’s third-largest retail market for iPhones, after the U.S. and Europe, and the closure of retail outlets across the country has also weakened demand for its products in China.

Market analysts have expressed concern about the virus’s ongoing impact on the tech industry and other market sectors. A concern echoed by nearly 8 out of 10 companies who reported that they didn’t have enough staff to run a full production line, according to a survey conducted by the American Chamber of Commerce in Shanghai on Feb. 17.

And with shipping times from China to Europe of around 6-8 weeks, the impacts on the supply of Chinese made components to European and American markets may not be fully felt until March or April, according to Wood Mackenzie.

“Although workers appear to be returning to plants, this is on a limited basis due to checkpoints and quarantines,” says Vaillancourt. “Therefore, industrial activity may take some time to ramp back up, and I don’t see the economy recovering until well into the second half of the year.”