Disruptions to global supply chains and shrinking demand due to the coronavirus outbreak have negatively impacted the industrial metals. The effects on the Chinese economy are, however, seen to be temporary and are likely to lead to a surge in pent-up demand as the epidemic passes.
Disruption of China's logistics and supply chains due to restrictions on travel and impacts on labor due to quarantines and fears of contagion have resulted in a marked slowing of industrial activity generally within the country. The resulting lower demand for raw materials among manufacturers and the construction industry, along with the disruption of road transport and congestion at Chinese ports, are having a strong impact on inbound and outbound trade.
Even though rates of infection in China appear to be falling and the government has ordered a general return to work, there have been outbreaks of the disease in countries outside China, including Japan, South Korea, Italy, Singapore and Iran, since the middle of February. This has raised fears of a global pandemic and heightened concerns that the virus could have a significant, longer-term negative impact on economic growth outside China.
Industrial metals hit by coronavirus fears
London Metal Exchange copper, nickel and zinc prices have lost between 9% and 14% since the start of the year on concerns that the coronavirus epidemic could have a longer-term impact on China's metals demand. 62% iron ore prices dropped to their lowest level in over a year at the start of February. Prices then recovered and closed Feb. 25 near levels at the start of the year, mainly due to supportive supply-side developments. Gold prices, however, have benefited from strong safe-haven buying as a result of the epidemic, rising above US$1,600/t for the first time since April 2013 on Feb. 18.
Coronavirus brings iron ore demand side back into focus
Prior to the epidemic, we anticipated that similar to 2019, global seaborne iron ore prices would continue to be dictated by the supply side in 2020. The epidemic has, however, brought demand back to the forefront of investors' near-term thinking. China is the leading producer of crude steel, accounting for 54% of global output in 2019. The Chinese construction sector accounted for 56% of the country's steel demand in 2019, according to the China Iron and Steel Association. Construction activity in the country has remained largely suspended due to the coronavirus, with work unlikely to resume in the near term. We expect that the resulting reduction in steel demand has lowered China's steel mill output. This will have a negative impact on China's iron ore consumption, putting downward pressure on seaborne iron ore prices in the near term.
We nevertheless continue to expect that iron ore prices will mainly be influenced by supply-side developments in 2020. Seaborne iron ore prices began rallying from lows in mid-February, partially due to Vale SA announcing that rain events in Brazil have forced it to lower its first-quarter production guidance to 63 million to 68 million tonnes from 68 Mt to 73 Mt. Prices have also found support from recent supply disruptions due to Tropical Cyclone Damien in Australia, which, together with Brazil, comprised 61% of global iron ore output in 2019. Despite these recent disruptions, we expect that restarts of Vale's suspended mines and near-term demand weakness related to the coronavirus epidemic will cause the global seaborne iron ore market deficit to slacken from an estimated 145 Mt in 2019 to 82 Mt in 2020. We forecast this to cause average iron ore prices to slide from US$93.30/t in 2019 to US$82.80/t in 2020.
Copper outlook deteriorates as coronavirus spreads
While the coronavirus epidemic has impacted the global copper supply chain, demand has been affected even more. On the supply side, copper cathode production has been reduced by an extension of the Lunar New Year holiday over health concerns and by pressure on smelters from official transportation restrictions to contain the epidemic. These measures have affected the delivery of cathode and its byproduct sulfuric acid, leading some smelters, such as Guangxi Nanguo Copper, to declare force majeure on copper concentrate deliveries. As a result, we have lowered our full-year 2020 global refined copper production by 230,000 tonnes to 12.45 Mt, due to a lower Chinese copper cathode production forecast.
Copper consumption has been impacted by reductions in manpower at manufacturing plants. We have also lowered our global copper demand estimate by 299,000 tonnes, based on a 290,000-tonne reduction in our Chinese demand forecast to 12.42 Mt. We now forecast the copper market to be in a 27,000-tonne surplus in 2020, compared with the 41,000-tonne deficit we forecast in early January. We have also lowered our forecast 2020 copper price to an average of US$5,997/t from US$6,211/t.
Global primary nickel market less tight in Q1 due to epidemic
We currently expect the epidemic to affect consumption of primary nickel more than production, which will ease tightness in the global primary nickel market in the first quarter of 2020. Chinese stainless steel producers have extended the suspension of their operations following the Lunar New Year break, which will lower Chinese primary nickel demand.
Although China's Hubei province, where the coronavirus outbreak first appeared, has no nickel pig iron, or NPI, plants, we expect the epidemic to lower China's primary nickel production. The epidemic's impact on raw material supply has prompted NPI producers in the Inner Mongolia Autonomous Region and Liaoning province to reduce output. We nevertheless still forecast a 69,000-tonne deficit in the global primary nickel market in 2020 on expectations that the Indonesian nickel ore export ban, which began Jan. 1, will tighten the market later in the year once the epidemic passes.
The epidemic could, however, lower Indonesian primary nickel production. On Feb. 25, the Indonesian government said the epidemic will likely delay development of Indonesian nickel projects worth about US$11 billion. Significant downward pressure on Indonesian NPI output from such delays could result in a tighter global primary nickel market than we currently expect.
Lithium, cobalt prices rebound amid constrained demand, output
The coronavirus epidemic will lower first-quarter auto, and subsequently new energy vehicle, or NEV, sales and production, reducing demand for lithium and cobalt. S&P Global Ratings expects auto manufacturers in China to cut production by about 15% in the first quarter of 2020. Hubei, the epicenter of the virus epidemic, accounted for 8.7% of China's passenger vehicle and 7.1% of NEV production in 2018 and is an important producer of automotive parts. Auto sector production remains uncertain in Hubei, although it is gradually resuming elsewhere in the country. Coronavirus impacts also extend beyond China, with Hyundai suspending vehicle production in South Korea due to disruptions in parts supply from China.
China's full-year auto sales could nevertheless increase year over year in 2020. The epidemic has made private car ownership more attractive as public transportation in a number of cities has been fully or partly suspended due to greater risk of disease transmission. There could also be more official incentive policies to bring auto and NEV sales back on track as the epidemic is contained. President Xi Jinping stated earlier in February the need to stabilize auto spending. Prior to the epidemic, China's Ministry of Industry and Information Technology announced there would be no significant reductions in electric vehicle subsidies as of July 2020.
Chinese lithium and cobalt compound prices have increased as labor shortages have reduced production and as logistics costs for product deliveries have increased; Ganfeng Lithium increased its sales price of battery-grade lithium hydroxide by almost 10% on Feb. 12.
Lithium and cobalt refineries have sufficient inventories to sustain their production for the time being, with lithium refineries particularly well-stocked due to raw material oversupply in 2019.
Zinc supply, demand affected by epidemic
Zinc output in January was up 23.1% year over year. In February, many smelters typically use the Lunar New Year period to conduct maintenance activities. With the extension of the 2020 holiday due to the coronavirus and a generally slow return to work, smelters face rising inventories of refined metal and, more critically, of sulfuric acid, as cargo shipments are delayed. The acid, an unavoidable byproduct, must be moved or production stops once tanks are full. Smelters with lower acid storage capacity have already cut planned February production.
Hubei is China's largest producer of galvanized sheet for the automotive sector. A prolonged slowdown in output from the sector is likely to put negative pressure on zinc demand. Demand for zinc from the construction industry, another large consumer, will depend on growth, which is likely to be impacted by the epidemic.
S&P Global Ratings expects the health crisis in China to peak in the first quarter of 2020. We therefore expect both demand and supply to move toward mitigation of the disruption in the third and fourth quarters, which Chinese smelters can accomplish by operating at higher utilization rates as the year progresses.
Historical precedence illustrates expectations for rebound in industrial metals prices
We expect industrial metals prices to recover once the coronavirus epidemic has peaked. These expectations are based on analysis of the performance of metals markets during previous outbreaks, such as the 2003 severe acute respiratory syndrome epidemic.
The expectations come with some caveats and risks as the Chinese economy has changed considerably since the SARS epidemic. China accounted for an estimated 48% of global refined copper consumption in 2019 versus 20% in 2003, according to our estimates. This suggests that the coronavirus could impact metals prices more severely than before. In addition, the recovery after SARS was enhanced by the rapid expansion taking place in China's economy at the time. In 2020, by contrast, China is in a gradual transition to more sustainable growth rates as the economy shifts toward domestic consumption.
Although the epidemic will have a net negative impact on 2020 Chinese GDP growth, we expect the eventual rebound in consumption to contribute to stronger markets for many industrial commodities in the second half of the year, extending into 2021. There is, however, a considerable risk that the coronavirus, now spreading globally at a fast rate, could impact global metals supply as well as demand.
Further analysis of the impact on the coronavirus epidemic on industrial metals markets can be found in the latest iron ore, nickel and zinc CBS reports (accessible by S&P Global Market Intelligence clients).
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.