Coronavirus to impact base metals market

The coronavirus (COVID-19) outbreak continues to spread across China, with official government figures putting the number of infected people at more than 73,000, and the number of deaths approaching 1,900 in China.

According to figures from the World Health Organisation, cases have also been reported in 27 nations, as far away as Iran, Canada, and Australia, with three reported deaths in Hong Kong, the Philippines, and Japan.

However, many believe that the Chinese government continues to underreport the number of people infected, with the actual number significantly higher at over 400,000.

As the virus continues to spread, not only is the human toll likely to get worse before it gets better, but as Chinese businesses are forced to either shut down or limit their operations due to labour shortages and interruptions to supply chains, the Chinese economy and economies the world over will also take time to recover.

A combination of quarantine protocols, transport restrictions, (around 760 million people are currently under some type of travel restriction according to the New York Times), staff shortages, and a government-mandated staged return to work, is already making February an economic write-off for China.

“I don’t think anybody is in panic mode at the moment about the Chinese economy,” says Pierre Vaillancourt, vice president and senior mining analyst at Haywood Securities in Toronto, “but there is a much more muted outlook, particularly for the first half of the year.”

Travellers at Beijing Capital International Airport in January 2020. Credit: iFotos/iStock.

Given that China is the world’s largest consumer of metals, it’s no surprise that the global metals market is reacting to a slowdown in Chinese industrial activity.

Furthermore, because buyers prefer to visit physical shops for products like cars and goods, the closure of retail outlets is also negatively impacting sales. Online sales are also suffering due to a shortage of delivery staff.

The lockdown is likely to remain in place for the remainder of February and possibly until mid to late March, further impacting the Chinese economy, with the knock-on effects already being felt globally.

Moody’s Investors Service has already revised down its global GDP forecast for China, lowering it from 5.8% to 5.2%, and expects the G-20 economies to collectively grow at 2.4% in 2020, down from 2.6% in 2019.

Also, Chinese mines often employ significant numbers of trained miners and plant operators from coastal provinces such as Jiangsu and Zhejiang. The 14-day quarantine period for workers crossing provincial borders is now leading to a bottleneck throughout the metals and mining industry, further exacerbating the economic impacts.

Wood Mackenzie has reported that at least half of the country’s mines are on extended shutdown, and of those that are open, most are not operating at full capacity.

China is a crucial player in the copper market and accounts for more than half of global demand.

“Although there is an expectation that the outbreak is unlikely to impact either copper supply or demand significantly,” says Haywood’s Vaillancourt, “the copper price is often a bellwether for the state of the global economy, and it’s taking a hit at the moment.”

Because of copper’s widespread applications in most sectors of the economy — from homes and factories to electronics and power generation and transmission — demand for copper is often viewed as a reliable leading indicator of economic health.

The London Metal Exchange three-month copper price fell from US$6,300 per tonne at the start of 2020 to US$5,700 per tonne at the end of January.

Daye Nonferrous Metals Group, located in Hubei province, where the epidemic originated, has reduced its copper production capacity, Fast Markets reported on Feb. 5, while Guangxi Nanguo Copper, although not a significant copper producer, has declared a “force majeure,” suspending its purchase of copper concentrates from suppliers due to the outbreak.

Hubei is also China’s single largest auto-galvanized sheet-producing region, and an extended shutdown in demand is likely to put pressure on zinc prices.

Henan Yuguang Gold and Lead in Henan province, which borders Hubei, has already shuttered half of its 300,000 tonne-per-year zinc production capacity due to the difficulty of moving large quantities of sulphuric acid, a by-product of the process, Reuters reported on Feb. 13. Declining demand for zinc used to galvanise steel was another reason for cutting back production, the news agency said.

Zinc smelters typically produce about 1.8 tonnes of sulphuric acid for every tonne of refined zinc. Although some acid is used in the production process, smelters have limited capacity to store acid, so the bulk is sent to chemical and fertilizer manufacturers.

However, because trucks are used for transporting the acid, labour shortages and movement restrictions have limited the ability of smelters like Henan Yuguang Gold and Lead to dispose of it. Combined with shrinking demand for the metal due to ongoing quarantines and lockdowns, the company had no choice but to limit its production, Reuters reported.

Reductions in zinc output from Chinese smelters will not only affect the zinc market in China but will have a knock-on effect on the rest of the world.

As China’s demand for imported concentrates drops, the world’s concentrate supplies will be driven further into surplus, placing upward pressure on zinc spot treatment charges (TCs). Compared with January, TCs are now US$10 per tonne higher, at around US$320 per tonne.

Primary lead producers are facing a similar predicament to zinc smelters, as limitations on acid storage and, over time, restricted access to concentrate, will lower production levels. And with much of China now immobilized, secondary lead smelters are also suffering from restrictions on the movement of scrap batteries, the primary feedstock for lead recyclers.

In the absence of an adequate supply of refined lead, battery manufacturing could slow or come to a halt. Since the outbreak, stocks of lead held by companies on the Shanghai Futures Exchange have dropped by over a third as consumers scramble for the material, according to Wood Mackenzie.

The reduced availability of lead and zinc, and other metals is being felt by companies in China and internationally.

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