How are coronavirus fears impacting commodity prices?

The respiratory coronavirus sweeping through China could result in a 1 per cent hit on China’s gross domestic product and industrial production if the 2003 SARS epidemic is used as a benchmark.

However, commodity analysts CRU Group noted that this time, the impact on global commodity prices is likely to be much larger given that China’s economy has grown significantly in the past 15 years and now consumes about half of the wold’s commodities.

There are significant differences in the two virus outbreaks.

China has been swift to take measures to contain the current 2019-nCov virus — which has officially infected more people than the SARS virus — implementing an unprecedented travel lockdown of 16 cities with a combined population of more than 60 million people.

It has also extended the annual Lunar New Year holiday, a period where China’s natural resource imports traditionally decline, by two days.

However, 2019-nCov appears to be capable of spreading before symptoms are noticeable, which could make quarantine efforts harder.

On a more positive note, fatality rates seem to be lower so far and efforts to develop vaccines are already making good progress.

Commodity Impacts

CRU said that while the SARS epidemic had a negligible impact on global growth, the impact of 2019-nCov is likely to be larger given that China’s economy is 4.5 times bigger than it was in 2002 and exports about three times more.

More importantly, it consumes about 50 per cent of the world’s copper and 60 per cent of its iron ore production.

China is also the largest importer of crude oil, which led Goldman Sachs to forecast that 2019-nCov could cause global oil demand to fall by 260,000 barrels per day.

Unsurprisingly, iron ore, copper and crude oil have all slipped since the middle of this month.

Gold (blue), iron ore (orange), copper (green) and oil (purple) prices over the past month.

The benchmark Brent crude is down about 7 per cent to $US59.34 per barrel while the WTI is down 6.7 per cent to $US53.96 per barrel.

Copper fell 9.4 per cent to just below $US2.60 per pound.

S&P Global Platts noted that many cities in China had decided to delay the restart of construction activities until further notice, which has negatively impacted steel demand.

Additionally, ports in the Hubei region have reportedly been closed to all vehicles except those used for epidemic prevention and control.

“It means that steel mills are not able to transport iron ores from ports to steel plants. Port inventory will go up and less iron ore inventory at steel plants,” S&P quoted a Singapore-based trader as saying.

Meanwhile, the Wall Street Journal quoted Sucden Financial head of research Geordie Wilkes as saying that the outbreak could reduce operating rates of refiners and smelters in China, which could have a substantial impact on commodity markets.

Hubei is home to WISCO (Wuhan Iron and Steel Corporation), a subsidiary of the steel producer Baowu.

Lion Selection Group investment manager Hedley Widdup told Stockhead that while the disruption to nickel is unlikely to be as dramatic as other commodities, it is a small market that is more exposed to supply and demand disruptions.

“Iron ore producers are generally larger companies and can wear short term demand issues more readily than small, single mine nickel concentrate producers that might be totally wedded to a sole offtaker,” he explained.

“The former can possibly wait a short period to recommence sales and potentially even catch up, whereas the latter might be put under sudden financial stress.”

At the other end of the spectrum, demand for gold has predictably strengthened over the same time period.

In contrast, global commodity prices barely moved during the SARS epidemic, which is consistent with the smaller role China had in world commodity markets at that time.

In the near term, CRU said the key uncertainties around the economic impact of the virus include how successful Chinese authorities are in containing 2019-nCov, how consumer and business sentiment will respond and any possible policy actions such as monetary and fiscal easing.

Read: Coronavirus fears send tourism and China-focused consumer stocks plunging