Commodity markets swamped by uncertainty amid Coronavirus outbreak
The current coronavirus outbreak in the Chinese city of Wuhan has contributed to renewed concerns over economic growth prospects, particularly in China, causing distress to the global economy. According to media reports, deaths worldwide have reached at least 1,370, with over 60,000 confirmed cases. Since the start of the epidemic, many commodity markets have been inundated with a high level of uncertainty.
According to market participants, the coronavirus outbreak is expected to have a worse impact on the global economy than 2003’s SARS outbreak. This is highly likely, as China has grown from being the world’s sixth-largest economy (representing 4% of the global GDP) in 2003, to the second biggest now (16% of the world’s GDP), highlighting that any slowdown in China’s economy has a high probability of reflecting on the world’s economy.
Mintec has analysed and dived into some of the commodity markets that are highly susceptible to the current epidemic.
Copper and Gold
China accounts for roughly 53% of the global steel production, being a major importer of iron ore as well as a major supplier and consumer of base metals. Since the end of December, metal prices have dropped noticeably, with copper prices (a leading indicator of gross domestic product (GDP) due to its widespread use in industry and construction) falling by about 9.6% between December 31st and January 31st (LME).
The virus outbreak has also impacted trade and global supply chain dynamicsfollowing the restriction of people and goods amid an extension of the Chinese New Year holiday. Therefore, transportation within and from the country has been impacted, further pressurising copper prices.
If compared to the SARS outbreak in 2002-03, China’s copper consumption could possibly decline by 500,000 tonnes as a result of the coronavirus. At the time, China’s copper consumption represented 19% of the total world’s consumption, however, China currently makes up almost half. In 2003 copper prices fell by 6% between February (when it was officially recognised by the WHO) and April, just before the Chinese government decided to raise the investments in infrastructure, to offset some negative impact of weak consumer demand, which led to copper prices increasing. If the government follows similar measures, this should result in positive demand for metal leading to a recovery in copper prices.
On the other hand, with copper prices falling significantly, gold prices shot up, as uncertainties in the global market encourage buyers to invest in safe haven currencies such as gold. As a result, LME (6 months) gold prices were trending 7% higher than December 2019, as at February 12th.
The uncertainty in China could also hamper global oil prices, as China accounted for half of the world’s oil demand growth in 2019.
China is the world’s largest importer of crude oil, consuming approximately 14 million barrels of crude oil a day - that is 13 out of every 100 barrels of oil produced by the world. As the coronavirus outbreak resulted in travel restrictions, the country’s demand for jet fuel reduced. Just a few weeks after the outbreak, the daily Chinese oil demand was already down 20% due to dwindling air travel, road transportation and manufacturing. Millions of people have been affected by the travel lockdown in Hubei Province, the centre of the outbreak. This has been responsible for a glut of jet fuel and diesel on global markets at a time when petroleum supplies were already abundant, and prices depressed. As a result, the crude oil price has dropped 15% m-o-m at the end of January on the Intercontinental Exchange (ICE), its lowest level since December 2018.
In response to the shrinking demand impacting global oil producers, some manufacturers across the globe have been cutting back their oil production. Sinopec, Asia’s largest oil refiner, which is owned by the Chinese government, has slashed its oil processing volume by 600,000 barrels per day, down 12%.
Pork and Chicken
China, the world’s largest pork consuming country previously faced shortages due to the occurrence of the African Swine Fever (ASF), the coronavirus outbreak is further aggravating the market situation. The low domestic supply has been exacerbated by the coronavirus, as roadblocks and lockdowns disrupted the flow of the meat to consumers. Furthermore, the launch of new pig breeding facilities has been delayed by the epidemic. With regards to imports, there are reports that pork shipments from the US to China have been delayed as a result of slower unloading of the meat at ports. As a result, the Mintec Chinese pork prices skyrocketed at 167% y-o-y and 11% m-o-m in the first week of February.
Additionally, according to the USDA, Chinese imports are forecast to be up 42% y-o-y in 2020 as a result of shrinking domestic production. Therefore, interruption in the revival of the pork industry due to the coronavirus coupled with higher reliance on imports is likely to result in firmer pork prices in 2020.
Apart from pork, chicken is the other meat impacted by the coronavirus. US and China recently signed a phase-one agreement, putting a halt to the prolonged trade war. China has been a lucrative market for US chicken, and the recent revocation of tariffs indicated positive signs of trade between these two giants. However, ships carrying refrigerated cargo containers of chicken from the US to mainland China are being diverted to ports in Hong Kong, South Korea, Taiwan and Vietnam which may cause delays and result in lower exports from the US to China. There’s currently no evidence that this has impacted US prices because of the interruption to trade. However, if the disruption continues, the US chicken prices are expected to fall in the short term. Furthermore, Chinese chicken prices are currently falling on the back of poor domestic demand and the outbreak of the deadly H5N1 bird flu.
The virus is expected to severely impact the trade and consumption of seafood. In the salmon market, where Norway and Chile are the top two exporters, Asian countries continue to experience a significant growth in imports of Norwegian salmon (up 16% y-o-y in 2019), with China alone registering an increase of 95% y-o-y, importing 26,300 tonnes in 2019, according to Kontali. For the Chilean salmon, China was the fourth largest importer in 2019, accounting for 7% of the total Chilean exports, shipping in almost 41,000 tonnes, 2% more than the previous year.
The exports of salmon to China, and seafood in general, are most likely to fall due to weaker demand and disruptions in the supply chain as a result of the virus. Since the beginning of January, Norwegian salmon prices have been on a downward trend, pressured down by various factors, including concerns over lower global exports due to the coronavirus. At the end of January, the Mintec price of farmed Atlantic salmon from Norway declined by 13% m-o-m.
China is the largest exporter of garlic, accounting for 80% of total exports. The coronavirus outbreak resulted in expectations of a disruption in global garlic trade, however, rising Chinese garlic prices do not support dull demand. Mintec’s Chinese garlic price rose by 9.3% m-o-m and 39% y-o-y in January 2020.
Furthermore, the US is the largest export destination for Chinese garlic. Approximately 30% of the US garlic market is import-dependent, of which China accounts for 63%. Mintec’s US garlic price - increased by 7% y-o-y and 4% m-o-m in January. The upward price movement in the US is likely to be a result of market speculations of supply shortage from China. The dried garlic market also experienced disruptions due to shipment troubles. However, as at the beginning of February, the garlic powder delivered to the US still seems to be unaffected by the outbreak, with Mintec prices down 4% m-o-m and 5% q-o-q.
Garlic prices in top exporting countries such as Spain, Argentina, and the Netherlands are expected to increase in the medium-term as some of the importers could divert their demand from China to these alternative suppliers. However, with China making up a significant proportion of the market, it will be challenging for any other origin to meet a significant shortfall in Chinese supply. The garlic prices in Spain were up 5% w-o-w in the first week of February 2020.
The Mintec price of Chinese pumpkin seed delivered to the UK has climbed 3% m-o-m since the virus outbreak and could increase even further. China is a major supplier of pumpkins seed to the global market, and following the restriction to factory production in China, some European traders have recently expressed concerns over supply shortages, leading to price increases. Issues with transport logistics could further hinder pumpkin seed exports due to a lack of transportation capacities between factories and ports and congestions in export harbours.
In the spice market, dried ginger could also experience disruptions to shipments with prices for this product most likely to increase. The Mintec price of dried ginger delivered to the US has advanced by 26% q-o-q, following a smaller crop in China last year. As of mid-January, the price reached $4.37 per kilo, registering an increase of 2% w-o-w and 2% m-o-m. In comparison, during the SARS outbreak back in 2003, prices for both the dried garlic and the dried ginger stayed relatively flat.
Other spices potentially to be impacted by disruptions to production and distribution include paprika, star anise and chilli. However, as of February 5th, the Mintec price of Chinese star anise sold in the US market was unchanged w-o-w or m-o-m.