Commodities | Feb 05 2020
Virus implications for metals, oil and China's GDP.
-Commodity prices have dipped with the coronavirus's spread, with iron ore, oil and copper hard hit, and base metal generally down 10-15%.
-Oil demand to drop with travel bans
-The full impact of the virus will depend on how quickly it is contained
-China, Asian economic growth to dip
-Outlook depends on containment
By Nicki Bourlioufas
With the coronavirus spreading rapidly, Asian financial markets have dropped as have commodity prices with industrial production halted in China and travel restrictions imposed. With questions hanging over Chinese economic growth, experts are comparing it to the SARS virus and say containment is key to a recovery in prices and growth.
Industrial production across China has come to stand-still as authorities seek to contain the spread of the coronavirus. Some ports are closed to imports and exports and travel restrictions to, from and within China are growing by the day.
Steel-related raw materials have been the most severely affected. Iron ore prices had declined by around -10% as at 30 January, falling to around US$82/t. With ports closed, traders expect ports stocks to rise, which may suppress prices further, says Jarden. Other base metals have sold off, led down by nickel with a -12% slide over 17 days to 30 January. Copper, which is generally the best read of investor sentiment given its role as an investment into global growth, has sold off by about -10% with the drops driven by fears about global growth, says Jarden.
Yet the broker is confident the coronavirus's economic impact will be contained. Authorities have learned the lessons from the SARS outbreak in 2003 and reacted more quickly. "This time, China rapidly isolated infection centres in Hubei and elsewhere … We expect the epidemic to end by March and China will resume its focus on stimulating industrial production." Jarden therefore expects lower commodity prices in 1Q, but still expects strength for steel raw materials to persist in 2020.
ANZ Bank says with travel restrictions being imposed, the economic impact will initially be felt most through reduced tourism activity, with a dip in jet fuel demand feeding through to oil. Crude oil prices plummeted -15% in January, the biggest January slide since 1991. Growth in China's demand for jet fuel was 7.2% in 2019, equating to 650kb/d. A -20% cut in domestic flights would reduce demand by 100kb/d, says ANZ. Adding a ban on tourist groups leaving China, could cause Asian jet fuel demand to fall by 400kb/d. Crude oil demand could drop by up to 500kb/d. "Even so, we would expect demand to rebound quickly after travel restrictions are lifted," predicts ANZ.
However, the outbreak conditions are rapidly changing, it's difficult to calculate the impact this may have on passenger numbers, with ban on people travelling out of China complicating estimates, says ANZ. British Airways, Lufthansa and Cathay Pacific and Qantas have cancelled various routes, among other airlines.
For copper, China's demand makes up around 50% of total consumption. The rally on the signing of the phase one trade deal with the US has now been wiped out by the impact of the coronavirus, adds Macquarie. Assuming a two-week shutdown, demand for copper could fall by levels similar to 2003's SARS outbreak, equating to a drop of around 100kt. "Once the spread is contained and complex impacts of the outbreak ease, we expect demand to rebound quickly," predicts ANZ.
Citi experts are not so confident that the coronavirus's impact will be limited. "The situation remains fluid, but it could pose a significant threat to oil demand, particularly during 1H 2020. Depending on the epidemiological course and its geographical reach, the epidemic may lower our annual oil demand growth forecasts by 150,000b/d in a high-impact scenario."
Macquarie believes that if the SARS history is any guide, a slowdown in new cases announced will be key to confidence returning and recovery. But China is very exposed to any escalation in the virus's spread. At the time of the SARS virus outbreak, base metals prices fell -5 to -15%, taking three to five months to recover to pre-SARS levels. By now China's share of demand is even larger, at around 50% for most refined base metals versus around 20% back in 2003, making the single-country exposure even greater, says Macquarie.
Impact on GDP may be muted
JP Morgan says for the overall Chinese economy, the impact on full-year 2020 growth will likely be limited, with the Chinese government having taken serious action much faster this time compared to the SARS outbreak. The investment bank still forecasts 5.9% year-on-year growth. While there are many uncertainties regarding the future development of the outbreak, if the virus outbreak tracks the 2003 SARS episode, JP Morgan forecasts significant downside risk in the next one to two quarters, especially in sectors such as tourism, catering services, transportation, likely followed by a quick rebound.
However, Goldman Sachs has lowered its China 2020 GDP forecast 40bps to 5.5%, with a sharply lower 4.0% in 1Q 2020 annual growth rate, down from 5.9%, followed by a bounce back in 2Q. Its worst-case scenario is for 5% growth this year, with the size and significance of China's economy suggesting a quick rebound is less likely this time round compared to the SARS outbreak.
ANZ Bank adds that with the severe travel restrictions being put in place by the Chinese authorities and by other countries mean that the economic impact will mostly be felt by nearby Asian countries through reduced tourism activity and reduced trade.
"The drop in economic activity in mainland China will lead to lower import demand across Asia. Taiwan and Vietnam are the two economies most exposed in terms of the potential impact on growth via the trade channel. We estimate that GDP growth in Asia ex-China and India could decrease by as much as -50bps in Q1 2020. This is less severe than the impact of SARS in 2002-03. The magnitude and duration of the impact will be determined by how quickly the current outbreak can be contained," says ANZ.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
FNArena is proud about its track record and past achievements: Ten Years On
