16 Mar 2020 | 20:57 UTC — London

'Rapid' recovery in Chinese metals market won't halt global price fall - analysts

London — China's metals sector is showing rapid recovery from COVID-19 disruption but trade disruptions in other parts of the world impacted by the virus pose key risks to this recovery, analysts including at S&P Global Platts said Monday.

After price falls in recent days in base and platinum group metals and even gold, metals prices could fall yet further in this new scenario, analysts at consultancy Roskill and ING Bank said. Roskill's Neal Brewster described the fall in metals prices so far this year as "relatively modest," while ING's senior commodities strategist Wenyu Yao maintains the metals market "has yet to hit bottom" with a short-term outlook that "is only getting gloomier."

"The supply growth of some metals hasn't slowed as many expected, and the large inventory overhang is just a mirror of how bad demand looks," Yao said "As COVID-19 continues to unfold globally, despite some positive signs from China, the market is set to become more volatile."

ING is far from calling a bottom in the industrial metals market. According to Yao, there were "no meaningful cutbacks" in Chinese non ferrous metals production during the two months the country was mainly in lockdown, leading to supply growth far outpacing demand, with inventory surging.

In aluminum, "production rose by 2.4% year on year in the first two months of 2020. Meanwhile, inventory has soared by over 168% year to date," Yao said, noting that expectations of further extensive stimulus from China may not necessarily boost demand "in an environment characterized by a short-term supply and demand mismatch."

London Metal Exchange cash copper prices, considered a barometer of global economic health, slumped to $5,530/mt Monday, from $5,715/mt one month ago, with aluminum down to $1,676/mt, from $1,701/mt.

'Rapid resumption' in China

Roskill claims metals production in China -- which consumes around 55% of the world's base metals -- is resuming rapidly. White-fused alumina producers in Shandong province are reported to be back to normal levels, with no restrictions on material shipments, and over 80% of Chinese steel mills are back in operation, Roskill's Brewster said in a weekly review.

China has recorded over 3,000 deaths as a result of COVID-19 and while risks of a second round of the virus reappearing in the country should not be discounted, economic activity now seems to be getting back to more usual levels relatively quickly as new cases numbers have fallen to less than 10 per day, Brewster said.

The number of new coronavirus cases outside of China has meanwhile been escalating rapidly in recent days – reported cases around the world are at the 6,000 – 7,000 a day mark, he said.

"However, a full recovery [in China] is still not expected until May or June," Brewster said. The new risk to the Chinese economy appears to be from disruptions to external trade. Should that eventuate, the Chinese government is reported to be considering a set of significant stimulus measures. Meanwhile, a halving in the oil price since the start of the year is equivalent to a $110 billion boost to the economy."

S&P Global Platts' Analytics said in a Global Economic Outlook that the expanding influence of COVID-19 outside China now remains the key risk to global economic health.

"The impact of the virus in China has clearly eased since people began returning to work in second half February," the Outlook said. "Even so, activity in China is still down 50% relative to normal. The draconian measures to contain the virus's spread means a sharp contraction in economic activity, but will hopefully set the stage for a sharp rebound once the incidence has peaked and containment has been successful. Early evidence seems to suggest that the more draconian the containment measures undertaken in the short term, the higher the chances of a sharp rebound."

Mining stocks down 40% YTD

Roskill's Brewster noted that global equity markets are now pricing in a major global economic downturn – US, European and Japanese exchanges are down 20%-30% year to date and major mining stocks are down around 40% on average – but at the moment, trends in the Chinese economy are more consistent with a sharp "V-shaped" economic disruption.

"It remains notable that whilst a number of metals prices have fallen since the start of the year the extent of the declines has, to date, been relatively modest," Brewster said. "Although some metal inventories may have accumulated downstream, there is little evidence of any build-up in raw material stocks The fundamentals impacting long run drivers do appear to have changed."

Editor:

Richard Rubin