Base Metals and Iron Ore Turning Red Hot as Coronavirus Turns into a Pandemic Threat
The feared pandemic threat of the coronavirus might be coming true with the Wealth Health Organization (or WHO) declaring the threat a global health emergency. The epidemic threat in China is now taking a turn towards being pandemic in nature with 151 confirmed cases outside China and 17,238 confirmed cases in China, as suggested by the data from WHO.
Post a nominal assessment, WHO admitted that the group assessed the situation wrong and further rated the risk to “High” on a global scale and a regional scale, while risk assessment for China stood at “Very High”.
- Impact Across Global Metal Markets
With China being the primary market for base metals and the recent turmoil instigated by the coronavirus has impacted the demand for base metals in China, which in turn, has created a global loop of plunging prices. Across the major indices, be it London Metals Exchange, Dalian Commodity Exchange, COMEX, NYMEX, Multiple Commodity Exchange, base metals are trading in the red.
The pre-holidays downstream demand for base metals has taken a deep hit with inventory for copper, zinc, and nickel building sharply across China. The local government had extended the New Year Holidays as a control measure to prevent the spreading of the coronavirus, which in turn, has led to a halt in the processing activities of smelters across China.
However, some of the smelters are back in business after a brief pause due to the extended holidays; albeit, many smelters are waiting for guidelines and are extending halt till 9 February 2020. Apart from the impact from halted processing activities, Chinese smelters are also facing headwinds from a fall in downstream demand for base metals in the wake of a hiatus put forward by the local government on transportation and construction activities across China.
- Base Metals Inventory Build-up
The social inventory for copper across the major trading market including Shanghai, Jiangsu, and Guangdong surged by 65,000 metric tonnes from 23 January 2020 to stand at 280,000 metric tonnes (as on 3 February 2020).
Zinc inventories across China rose substantially amid holiday seasons and weaker downstream demand. The social inventory of refined zinc rose across the most prominent regions such as Shanghai, Tianjin, Guangdong, Hebei, rose by 60,000 metric tonnes from 23 January 2020 to stand at 189,000 metric tonnes (as on 3 February 2020).
The refined inventory across China is expected by market participants to rise further post-holiday break as on-route cargoes which halted amid logistic issues due to the fears of coronavirus outbreak.
Nickel ore inventories across all the major Chinese ports soared by 42,000 metric tonnes from 23 January 2020 to stand at 14.43 million wet metric tonnes (as on 3 February 2020). The coronavirus outbreak halted the shipment in and out across Chinese ports, which in the metal context, accumulated 200 metric tonnes of nickel, which stood at 122,800 metric tonnes (as on 3 February 2020).
The iron ore port inventory rose significantly in December 2019 to mark a yearly increase of 17.19 per cent at 101 million metric tonnes; however, the average delivery from the 35 significant ports in China plunged amid indication of a drop in steel demand.
The steel mills across China now have plenty of iron ore inventory to run till clarity on guidelines by the local authorities, thus expected to reduce the demand for iron ore over the short-run.
- Drop in Steel Demand
The steel demand is expected by the market to fall ahead amid weaker economic activities in China and halted construction and infrastructure push. While the inventory of iron ore with steel mills is sufficient to run the production till 9 February 2020, the slower development activity across China against the pre-holiday seasons is expected to lower the steel demand.
The market estimates of lower demand unfolded quickly, and as soon as the market across China re-opened for trade, the price for steel fell rapidly.
Not just China, the steel price fell across the international market as well with price dropping by ~ 4.37 per cent on the London Metals Exchange from its 2 February 2019 closing price of USD 436.06 per tonne (steel rebar near-month contract) to the level of USD 417 a tonne (as on 3 February 2020).
- The Price Plunge
Steel was not just the only commodity which reacted sharply to the dire impact of slowdown led by the coronavirus outbreak; ferrous and non-ferrous metals reacted similarly across the globe.
Copper futures on COMEX fell sharply from USD 2.563/lb (intraday high on 31 January 2020) to the present low of 2.497/lb (intraday low on 3 February 2020), which marked a fall of ~ 2.57 per cent; however, copper prices have recovered slightly during the trading session today on COMEX, with prices recovering from yesterday’s low to the present level of USD 2.550/lb (as on 4 January 2020 4:25 PM AEDT), a recovery of ~ 2.12 per cent.
Iron ore prices reacted sharply post the trading market in China resumed on 3 February 2020, and the iron ore futures (Feb Exp- DCIOG0) on the Dalian Commodity Exchange plunged from RMB 709.5 (close on 23 January 2020) to open at RMB 653.00 (as on 3 February 2020), which marked a gap-down opening of ~ 7.96 per cent.
However, the expected start of activities across Chinese steel mills supported the iron ore price, and the futures contract recovered to the present level of RMB 729.5 (as on 4 February 2020 4:34 PM AEDT).
What to Expect Ahead?
Iron ore futures are expected by the market to remain under pressure over the short-term as Chinese mills are currently reluctant to restock the raw material and would not demonstrate any aggressive restocking amid falling steel prices and projected lower demand for steel.
Investors should now closely monitor the steel inventory levels as any build would exert more pressure on iron ore and steel prices; however, a gradual strategic decline in steel inventory by Chinese still mills to balance the demand and supply dynamics could provide steady support to the prices of both the commodities.
Copper futures are expected by industry experts to trade low ahead over the halt in construction and development activities in China. Also, the demand for copper ore could take a hit amid higher treatment charges (TCs) for smelters in China. However, recent preventive measures, taken by the local government, and suggestion to contain the virus outbreak by the WHO could help to control the impact of the coronavirus outbreak on base metals.
Investors should monitor any build or drawdown in base metals inventory along with the treatment charges to reckon the price direction ahead.