Commodity prices have fallen sharply since January as China battles to contain the coronavirus outbreak that has killed more than a thousand people and disrupted factories and businesses in the world's second-largest economy.
Prices of agricultural produce, metals, energy and industrial raw materials have fallen 5 per cent to 20 per cent in the last two weeks, as China is the world’s biggest consumer and producer of several commodities. Base metals and oil prices have been particularly hit. The Bloomberg Base metals index has dropped 10 per and Brent by 17 per cent since the outbreak began late last year.
“We have revised lower our commodity prices forecast, especially for the first quarter of the year. We expect a weak first quarter but would not be surprised to see a strong rebound in prices once the situation is deemed to be contained and under control,” said Bernard Dahdah, senior commodity analyst at Natixis Commodity Research, a London-based investment bank.
Dozens of Chinese provinces extended the country’s New Year holidays by more than a week to contain the outbreak, affecting production across industries. According to Bloomberg, those regions account for about 90 per cent of copper smelting, and 60 per cent of steel production. Hubei province and its capital city Wuhan, places called the epicentre of the outbreak, extended holidays by a week. Natixis said Hubei produces around 5 per cent of the country’s steel production and Wuhan is regarded as China’s steel “home”. Hubei accounts for around 4 5 per cent of the China’s production of blister, which is used in packaging, and for concentrate, from which refined metal is obtained.
Wuhan is the biggest water, land and air transportation hub in mainland China and home to major commodity-consuming businesses like Renault and PSA.
Crude oil demand has also dropped by around 20 per cent (roughly 3mn b/d) when compared with the same period last year. This is considered as the largest demand shock since the financial crisis and the most abrupt one since 9/11. Typically, the Chinese New Year holiday drives higher demand for jet-fuel and an increase in road, rail and air transport. The traveling was down by around 40 per cent compared with last year.
The impact of lower demand for oil is creating bottlenecks. Stockpiling by local Chinese refiners is rapidly rising and it is estimated that refinery cuts could come soon (cuts of around 15 per cent). Sources in India’s petrochemicals business said that, “independent oil refineries could cut as much as 800,000 b/d amid swelling inventories, unlike nationals, they are not allowed to export.” Several petrochemicals prices have fallen 4 to 10 per cent since January.
A Mumbai-based indenting agent for chemicals and petrochemicals said that consumers are worried about future and there is an atmosphere of uncertainties.
Natixis said that, “Refiners, smelters and mills are currently facing considerable logistical challenges because of port disruption and lockdowns. There is also the matter of sourcing raw material goods and what appears to be a considerable slowdown in construction. In light of the weaker demand, we have revised lower our Q1 forecast for both energy and base metals: Copper forecast has been revised from $6,200/t to $5,766/t, aluminum from $1,810/t to $1,706/t and Brent from $62/bbl to $59/3/bbl. For base metals, the situation has somewhat damped our outlook for the remainder of the year. Oil price could rise if OPEC cuts production.”