Once the outbreak of the coronavirus became widely reported in mid-January, various markets reacted differently and continue to do so. Base metals’ prices have fallen by an average of around 11%, while western equity indices had a much milder reaction.
The Dow Jones Industrial Average peaked, based on the close, at 29,348.10 on January 17, before falling to 28,535.80 by January 27, a 2.8% drop, while over the same period the Euro Stoxx 50 dropped by 3.4% to 3,677.84 from 3,808.26.
Indices that are more dependent on trade with China have been affected quite differently, with Australia’s ASX 200 dropping by 1.9%, while the Hang Seng was recently trading 9% below its January 17 level. Although it is not surprising that the Hong Kong SAR Hang Seng Index has fallen more than the others – given its proximity to mainland China – it is somewhat surprising that Australia’s index has not suffered more given that so much of its commodity exports go to China.
With London Metal Exchange base metals prices focused on global supply and demand factors, the fact that prices are down by an average of 11.1% since the market began reacting to the virus outbreak, does imply that Dr Copper and the rest of his team are the most worried about the development.
Given the reaction in industrial metals, you would expect havens to be buoyant but gold prices – while firm and recently quoted at $1,576 per oz compared with $1,552 on the day before the markets started to react to the virus – are hardly racing higher. Indeed they are below the peak ($1,611.25 per oz) reached when United States’ forces assassinated Iran’s General Qasem Soleimani in early January.
All in all, the markets are, therefore, sending mixed messages about the likely fallout from the virus, which in a way is not surprising as it is still early days.
China first reported the virus to the World Health Organisation on December 31 and, as of January 30, some 9,776 infected cases and 213 deaths have been confirmed. The virus is spreading rapidly, with the total number of reported cases climbing by around 28% per day in recent days and given the size of China’s population – 1.4 billion – the numbers of infected could inflate before it is contained. Although, reporting may well have been restricted due to the Lunar New Year holiday. As such, in many ways it is foolhardy to try to second guess what the impact will be, but we have listed a few of our concerns.
Demand shock in China
Metals’ reaction during SARS epidemic China’s refined metal production was mixed, with lead and aluminium production flatlining over the two quarters following the outbreak in the fourth quarter of 2002, while nickel and tin climbed and only zinc took a hit.
China’s consumption of metals showed zinc demand also fell, as did lead, while nickel and tin climbed the most and copper and aluminium moved higher.
Fastmarkets’ analysts in China, however, think the impact may be stronger this time than it was during SARS. Back in 2003, the economy was experiencing double-digit growth so was able to take a hit amid the SARS outbreak, but this time round the Chinese economy is weak and the outbreak comes amid the economy suffering from an 18-month trade war with the US. That said, given the weak economy, the supply chain is likely to be lean, so there may not be a lot of room for further destocking.
Most LME prices did dip during the SARS outbreak – especially copper, aluminium, lead and zinc – while the smaller metals, nickel and tin, were not too affected (see chart below). The main impact on metals prices was in March and April 2003, three months into the outbreak.
This time around, the Chinese have been much more proactive in handling the outbreak than they were at the time of the SARS outbreak and social media has helped ‘spread the word’, so perhaps it is unsurprising that metal prices have reacted quickly.
The other big difference between then and now is that the, now famous, super-cycle was getting underway in 2002, but today global growth is weak after having endured 18 months of trade wars. Market participants were hopeful there would be a rebound in China in 2020, which would pull the global economy up, but this is more than likely going to be delayed now, but hopefully not too long.
This article has been written by our team of analysts at Fastmarkets, who are responsible for providing an independent view on market developments and forecasting their future performance.