While risk aversion continues to pervade markets worldwide, commodities - with the exception of gold - have broadly suffered.

Markets are focused on the pace of the spread of the virus, which shows no symptoms for a fortnight after contraction and is contagious during the incubation period. If an acceleration of the virus leads to lower global growth, as many analysts now expect, commodities will continue to take a hit.

But there are other aspects at work in each of the key markets.

Soybeans
Take agricultural commodities, for example.

As recently as in 2017, soybeans accounted for just over half or $12.2 billion of the $24 billion of agricultural exports made by the United States to China. When the US-China trade war began in 2018, that figure sank by a massive 75% to account for just $3.1 billion of soybeans exports during that year.

The tariffs were not going to destroy Chinese soybeans demand because they’re a key food source for pigs, with pork a staple part of China’s diet. To get around the trade tariffs, Chinese buyers naturally sought out replacement supplies, with a bumper crop in Brazil currently providing an ideal stand-in.

That was all well and good before the US and China signed a “Phase One” trade agreement in December. As part of that deal, China has committed to increase its agricultural trade with the US by $19.5 billion from 2017 levels to $40.4 billion in annual US farm exports by 2021.

If this looked ambitious previously, particularly given that China has established an alternative supply chain, it looks highly unlikely while demand is damped by restrictions due to the coronavirus.

Chinese soybeans demand has also been hit by an outbreak of African swine fever in Chinese pigs that has continued since August 2018, halving China’s hog herd and lifting margins for processing soybeans into animal feed.

These factors help make the Phase One deal redundant: Beijing was careful to ensure its purchases under the new agreement would be based on domestic requirements, leaving it a get-out clause in the event of unforeseen events such as demand shock.

Recovered paper
Similarly, the paper market had been facing its own issues in China long before the coronavirus arrived.

The Chinese government, which has been reducing its purchases of recovered paper for the past several years, plans a complete ban on imports by next year. Mixed paper has been banned since the start of 2018; old corrugated containers (OCC) and other recovered fiber grades can be imported with strict contamination thresholds.

Data from China’s General Administration of Customs show that imports fell by almost 40% last year from 2018 levels and are down by some 65% since 2015.

Recovered paper import permits for 2020 are already lower than at the same time a year ago. Industry sources expect permits for recovered paper imports to decline by a further 32% this year from 2019 levels, Fastmarkets RISI said.

Given China’s weight in the global paper and board market, even relatively modest changes can have a significant impact.

As a result of the turmoil in the recovered fiber market, Chinese users of corrugated packaging have reduced their consumption through weight reductions and the use of reusable plastic boxes.

China has also increased its own domestic capacity of virgin-fiber carton board and looks set to displace imports that have traditionally come into the region from Europe and North America. Some of the new Asian production is starting to find its way into export markets.

Metals
The metals industry is meanwhile waiting to see how long the closure of production plants and restrictions on travel and transport in China will last.

Already hit hard by trade tariffs, geopolitical risks and protectionism, which have dampened China’s already slowing growth outlook, the metals industry has been faced with the prospect of reduced consumption in China for some time. This is particularly true given that China is managing a switch to a consumption-led economy from a manufacturing-based one.

But metals are still critical to the Chinese economy.

Wuhan, the epicenter of the outbreak, is the headquarters of Baowu Steel Group’s Wuhan Iron and Steel Corp, or Wisco. It sources its raw materials - including iron ore - along the Yangtze River, which along with the Hanshui River is a key transport hub in central China.

Hubei province, where Wuhan is located, produced around 36 million tonnes of steel or roughly 4% of China’s total steel output last year, official data shows.

A potential transport ban due to the virus would prevent the movement of key materials to producers, as well as deliveries of food and fuel.

For the steel sector, delays in deliveries to domestic markets due to logistical issues would probably mean producers turn their attention to the export market instead.

Fastmarkets’ steel rebar index export, fob China main port was $471.75 per tonne on January 23 - the last working day before the start of the country’s Chinese New Year public holiday. This suggests a small spread of $3-7 per tonne in favor of export prices.

The China Council for the Promotion of International Trade is offering "force majeure certificates" to businesses in China affected by the virus, giving them an element of protective cover in the event they cannot meet their contract terms.

The copper sector is similarly facing logistical questions, with companies already starting to question whether it’ll be possible to open letters of credit (LCs) or bank guarantees in the time required before cargoes are discharged.

There is also a concern the spread of the illness will mean factories and plants will not have enough staff to operate. A similar situation occurred during the SARS - severe acute respiratory syndrome – outbreak in 2002-2003, when plants and factories were closed after employees became ill.

The longer-term impact on global growth is being exacerbated by the virus; but this is not just a Chinese phenomenon. SARS reduced Chinese gross domestic product by 1% and had a knock-on impact on global growth because exports to China slumped.

The tragic human element of the situation aside, the tightening of the aluminium market due to the closure of capacity is something the industry has been demanding for some time. On the flipside, Hubei is also home to the production of 25 million per year or 9% of China’s motor vehicles, which are a large consumer of metals including aluminium.

Fastmarkets’ research team has already cut its 2020 aluminium demand forecast to 2% from 2.6% previously as a result of the virus.

There are still plenty of unanswered questions. But it is clear that the problems being faced by the commodities markets existed prior to, and are only being exacerbated by, the coronavirus.