Global Commodity Markets are Underestimating Impact of Coronavirus, Warns Citi
Date: Tuesday, February 11, 2020
Global commodity markets are underestimating the coronavirus.
That’s according to Maximilian J. Layton and a team of analysts at Citigroup, who warned that those markets are barely reflecting the deadly outbreak’s disruptions to supply chains and ”major short-term headwinds for Chinese demand and imports.”
“We urge near-term caution on metals and bulk commodities as there are increasing signs that post-Chinese New Year economic activity restarts will be further delayed after February 10, or early restarts may trigger another round of virus outbreak leading to further large-scale quarantine,” said Layton. “Either case would result in additional commodity demand destruction which has barely been priced in.”
While global commodities prices have been pressured by virus headlines, Citi expects iron ore prices to drop further to $70 per ton, copper to $5,300 a ton, palladium to $2,100 an ounce and Brent oil to $47 a barrel in the near term.
“We find that the seven worst impacted Chinese provinces, by the level of confirmed cases, account for around 35%-40% of Chinese GDP, automotive output, property new starts, and over 70% of air conditioner output,” said Layton and the team.
Those same provinces contribute just 7% to 26% of China’s metal production. “Even if production is cut as much as consumption, those metals in which China is a major net importer will see major increases in inventories ex-China over the coming weeks,” said the analyst.
Citi said Tom Tom’s China traffic index, which tracks activity by cities, indicated a 62% annual activity decline as of Feb. 7. Activity is down 74% year on year for the seven worst impacted regions.
Looking ahead. While Chinese factories were set to get back up and running on Monday, protective gear remains in short supply, the analysts said. China’s labor force is more than 800 million and the capacity for making masks in the country is reportedly 20 million a day.
Media reports indicated a large number of factories remained shut in China on Monday after the extended Lunar New Year holiday. The analysts expect manufacturing hubs won’t start up until there is a sustained decline in suspected new and confirmed cases outside of Hubei.
If Citi’s forecasters are correct, the bargain-hunting among global commodities may have to wait until the coronavirus headlines are far less grim.