Coronavirus spreads to industrial commodities, prices decline by up to 9%

Base metals, energy, rubber and silver decline on weak demand following extended Chinese new year holiday

Prices of industrial commodities, led by copper, brent crude and rubber, declined by up to 9 per cent in less than two weeks because of weak demand caused by an extended New Year holiday in China, which has been hit by coronavirus outbreak.

Since January 17, when the coronavirus outbreak came to light, copper on the benchmark London Metal Exchange (LME) has plunged 9 per cent, followed by nickel (8 per cent), and zinc (6.7 per cent). Prices of brent crude declined by 9 per cent in the same period to trade currently at $59.3 a barrel. Prices of natural gas and rubber also fell by 3.4 per cent and 7.7 per cent, respectively.

China, the largest consumer of base metal and rubber, and the second largest consumer of crude oil, has extended the Lunar New Year break to February 2 in an effort to prevent travelers from contributing to the spread of coronavirus.

The holiday week was originally from January 24 to January 30.

Since the Chinese government isolated affected cities from the rest of the country, the supply of finished products and demand of industrial commodities has waned.

“The only reason for the price decline in industrial commodities is the weak demand due to coronavirus outbreak in China. Prices of industrial commodities are likely to bounce back in the medium-term given that the government of China quickly acted upon to control further spread of coronavirus. Also, the demand of industrial commodities is expected to revive gradually after Chinese traders resume activities after the New Year holiday,” said Gnanasekar Thiagarajan, Director, Commtrendz.

Nearly half a dozen Chinese cities that are connected closely with the Southeast Asian markets have been quarantined, potentially cutting off the Chinese market from the world.

 “Cities have been quarantined, travel restriction imposed, industrial and retail procurement is at a standstill. Even the festive season buying has been greatly impacted as massive tourist movement from and to China has been curtailed, leading to the decline in the prices of rubber, crude oil and base metals. While there was a small recovery on Tuesday, the long-term impact of the virus attack on the commodity demand and prices will continue till China recovers from the pandemic,” said Pritam Patnaik, head (commodities), Reliance Commodities.

Meanwhile, the long-term prospects of industrial commodities are expected to remain highly volatile — bullish in the first half of the calendar year 2020 and bearish in the second half due to US presidential election.

Also, global equity markets have reacted sharply to the coronavirus outbreak, with leading world indices nosediving in the last two weeks. While prices of silver declined due to slow industrial production growth, gold moved in a narrow range.

The global economic uncertainty ahead of the US Federal Open Market Committee (FOMC) meeting has prompted analysts to forecast “no rate cut” in the US in its meeting in January. Analysts see one or two rate cuts possible this calendar year to support the economy which fears weakening of dollar and support to industrial commodities in the long run.