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Unknown impacts of coronavirus outbreak casting uncertainty over metals, mining

Miners around the world are feeling the impact of the coronavirus outbreak as fears around the disease slow China's economy and cast a dark sentiment over global markets.

Globally, there have been nearly 76,000 confirmed cases of COVID-19, according to a Feb. 20 update from the World Health Organization. COVID-19 is caused by a member of the coronavirus family that is a close cousin to the SARS and MERS viruses that have caused outbreaks in the past. With the outbreak hitting hardest in the Chinese business and industrial hub of Wuhan in the province of Hubei, the effects are quickly rippling throughout the entire economy.

"The country is a major supplier and consumer of base metals as well as a major importer of iron ore from the seaborne markets for its domestic steel industry — which accounts for roughly 53% of global steel production," Moody's Investors Service said in a Feb. 4 note. "Given the importance of economic expectations for China to the base metals and iron ore industry, market sentiment has turned negative and prices are retreating sharply."

The most impacted provinces in China account for over 90% of the active businesses in the country, data and analytics firm Dun & Bradstreet estimated in early February. While the outbreak may not impact many mining companies directly, many of the affected businesses in China are in services, wholesale and manufacturing, all of which could affect demand for raw materials as productivity drops in response to efforts to contain the virus.

The Dun & Bradstreet report estimates that roughly 163 of the Fortune 1000 companies around the world have a Tier 1 supplier in the region, while 938 of those companies have at least one Tier 2 supplier in the area.

"China is the key player in the international supply chain for thousands upon thousands of goods," University of New Haven assistant economics professor Patrick Gourley said in emailed comments. "The quarantine over the Wuhan area in China has the potential to disrupt many of these supply chains depending on its geographical size and duration."

Copper, aluminum, zinc, lead and other commodities have seen prices retreat to varying levels since the outbreak. In a Feb. 18 outlook, diversified metals and mining producer BHP Group recently highlighted the outbreak as a significant potential headwind through 2020.

"For the 12 months ahead, we assess that directional risks to prices across our diversified portfolio are mixed, with the duration and intensity of the novel coronavirus outbreak a major source of uncertainty," wrote Huw McKay, vice president of market analysis and economics at BHP. "There is obviously clear downside risk to the outlook for China and its key trading partners if the COVID–19 outbreak is not contained within the time frame we have assumed in our base case."

For some commodities, the negative sentiment around prices is upending recent gains from phase one of the U.S.-China trade deal. News of the agreement offered temporary relief to a sector of the economy beset by geopolitical and economic concerns.

Before the outbreak, for example, Wood-Mackenzie noted that the near-term outlook on Chinese GDP growth had been positive, and metals demand was improving. Now, restricted labor movements in China are expected to impact demand for materials such as steel as construction projects and other downstream industries see delays.

"This is typically a period of expansion that leads to a pick up in demand for steel and raw materials," Wood Mackenzie said in a January report on the outbreak. "The construction sector accounts for two-thirds of Chinese steel demand, and the implications of these delays are stark."

The effects of the outbreak will not necessarily be negative for all market participants.

Australia-based South32 Ltd. CEO Graham Kerr noted on the company's Feb. 13 earnings call that COVID-19 could also, for example, provide some price support for alumina as the outbreak eases a supply surplus. Many businesses are also counting on the bulk of the impact being limited to the short term.

"Obviously, the development of the coronavirus threw a bit of a spanner in the works here," Century Aluminum Co. President and CEO Michael Bless said on a Feb. 20 earnings call. "At this point, it's unclear what the near-term picture will look like, but we think it's reasonable to assume that the economic impact will be short-lived, and the bounce back will be rapid."