How the resurgence of Covid-19 in China is affecting the base metals sector

China's base metals industry seems to be taking the biggest hit from the country's latest virus-control restrictions, with the authorities sticking with a restrictive “dynamic clearing” approach in a bid to see off the country's worst Covid-19 outbreak since early 2020.

Quarantine requirements and mass testing, along with on-and-off lockdowns, have been enforced in infection-ridden regions and this has made cross-province and cross-city transportation more difficult since the arrival of the Omicron variant in March, and now poses a direct threat to downstream and upstream base metals operations.

“Although the [Covid-19-related] disruptions normally don’t last long… the impact can persist… especially recently [and] the epicenter [could] be a key manufacturing hub next time,” a lead concentrate trader in China said.

Snap detection and targeted lockdowns comprise the country’s “dynamic clearing” strategy, which previously resulted in minimum disruption while containing the virus.

But the more transmissible omicron variant has led to more-stringent prevention measures being put in place, which is disrupting physical trading in the base metals, with no end to the disruption in sight.

Cross-province trucking problems

Delays or stoppages to upstream base metals transportation have become more common in certain regions, where the range of restrictions include truck drivers producing evidence of a negative nucleic acid test before being allowed to cross provinces. In turn, the restrictions are affecting downstream production process.

For example, since the middle of March, two alumina refineries in south China have had to curb production due to a shortage of bauxite feedstock caused by trucking delays, several alumina traders in China told Fastmarkets.

“The port is still open, but the issue [is] that fewer eligible truck drivers can be found under the [latest Covid-19 prevention] requirements,” an industrial market participant said.

There was a similar scenario in Shandong province in north China – a key alumina production hub – where delays meant smelters were unable to transport the bauxite-derived alumina to enable them to produce aluminium, leading to lower alumina prices in Shandong.

Alumina output in Shandong province was 25.5 million tonnes in 2021, accounting for roughly 33% of the country’s total production of 77,471,500 tonnes, according to data from China’s National Bureau of Statistics (NBS).

“As a result, the domestic alumina price rose in the south but dropped in Shandong province, which goes some way to explaining the little price gap between south and north now,” an alumina trader said.

Fastmarkets’ most recent price assessment for alumina metallurgical grade, exw China was 2,950-3,000 yuan ($) per tonne on Thursday, March 31.

The trucking issue is also having an impact on the other base metals, including copper.

“Transport is very slow now, with inward and outward deliveries both being affected, [and] demand is also turning quiet,” a cooper fabricator source said.

Closed-loop operation

To keep businesses running, meanwhile, the local authority issued quarantine mandates, with staff in Shandong province isolated at their workplaces and working in a closed-loop, a local source told Fastmarkets.

“I haven’t been back home since the start of a local outbreak,” one alumina trader in Shandong province said.

The closed-loop procedure has been imposed across several regions, including Inner Mongolia, Shandong and Hebei province in northern China, where Covid-19 infections have been flaring up, another alumina trader in north China said.

More recently, China’s financial hub Shanghai, home to the offices of the Shanghai Futures Exchange and some of its bonded warehouses, along with most commodity traders, has seen base metals trading operations closed off as part of the city’s phased lockdown.

“Rumors have been circulating that one aluminium smelter in Shandong exploded. It’s not a big drama though, just an electronic cell leak, but the mode of working has definitely been reshaped by Covid-19,” the alumina trader in north China said.

China has logged 29,306 infected cases as of March 31, bringing the total infections to their highest level since 2020. China does not include asymptomatic infections as confirmed cases.

The country has tweaked its Covid-19 strategy in recent weeks to ensure the balance between virus-clearing and social and economic development, but sources said that as long as the central government sticks to its zero-Covid policy, and as long as the threat from a more infectious variant of the virus is still there, uncertainty will remain in terms of base metals production and trading.

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