The saying about China’s economy sneezing has proved true in the commodities space: bulk and base metals and oil and gas all have a cold after the coronavirus outbreak.
China is the world’s largest importer of oil and consumes half the world’s metals, and a possible turnaround in prices has been stopped in its tracks. Oil, copper, iron ore and coal prices have all been hit as the Chinese government works at limiting the damage from the virus. Soybean and cattle prices have also been hit.
The world’s largest copper buyer, China’s State Grid, has paused tenders, and oil imports have been put off as well. Copper had been improving at the start of January but fell 12 per cent to $5,569 per tonne, not far off its 12-month low, as the impact of the virus became clear. Iron crashed from over $90 per tonne (t) to $78/t on the news, and WTI and Brent crude prices are down 15 per cent on the beginning of 2020.
Now, the question is when Chinese manufacturing will recover. BMO Capital Markets analyst Colin Hamilton was optimistic. “We feel there will be an opportunity to increase industrial metals exposure, but only after the pace of new infections has peaked,” he said. Copper and iron ore miners in London lost between 8 and 20 per cent between 20 January and the start of February, with Kaz Minerals (KAZ) the worst hit. Valuations started to recover at the end of January, although the coronavirus losses have not yet been covered.
Saxo Bank head of commodity strategy Ole Hansen said it had been a “brutal” couple of weeks, and also pointed to the “third lowest in history” gold to copper ratio, as buyers looked to the safe-haven precious metal.
Out of the oil and gas supermajors, BP (BP.) was down 8 per cent between 20 and 31 January, while Royal Dutch Shell (RDSB) fell 13 per cent, with similar losses for the US giants. BP has recovered the best after upping its dividend on former chief executive Bob Dudley’s last day.
BP finance chief Brian Gilvary said in his company’s 2019 results announcement the outbreak could cut expected oil demand growth in China by up to 40 per cent. BP’s forecast for year-on-year demand growth was 1.2m barrels of oil per day (bopd), and Mr Gilvary said the global reaction could cut 300,000-500,000 bopd from this figure. “And then the question will be whether OPEC balances [production] or not,” he said.
There are reports OPEC and Russia have considered cutting supply to cover the demand drop, although the group has not confirmed a plan either way. Forecasts for the size of the demand drop vary. A Bloomberg report has it at 20 per cent, or 3m bopd, a figure described by Wood Mackenzie Asia Pacific vice chair Gavin Thompson as “alarmist”.
WoodMac sees China’s oil demand falling 3.5 per cent quarter on quarter, although with a “strong rebound” in early summer, thanks to China’s “unprecedented” coronavirus containment measures that could see it beating the three months it took to get a handle on Sars in 2003.
A drop in demand could have already been balanced out by a cut in production in Libya because of political turmoil there, however. Production is down to 204,000 bopd from over 1m bopd at the start of the year, according to Bloomberg.
Despite improvements in China-exposed companies’ share prices, there will be a slowdown according to most observers. BMO has cut its GDP growth to 4.5 per cent year on year in the March quarter, and to 5.5 per cent for all of 2020, “implying essentially no growth in Q1 from the prior quarter, but some rebound in Q2”. These forecasts are being made without much clarity on how far the coronavirus will spread and how long China will slow output.
Investors all want to buy low, so the question here is how long the coronavirus malaise will last. With the number of people infected by this virus still rising and hundreds dead, it’s not clear when China will allow workers to return to factories and commerce to return to full steam. As per BMO and WoodMac, there is confidence in a recovery by mid-year, if not sooner. We maintain our bullish take on copper, the hold on Royal Dutch Shell and sell on BP for non-virus reasons.
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