As the coronavirus health scare deepens after spreading beyond China, markets globally face both supply and demand side risks.
Europe metal prices face twin pressures as coronavirus spreads
Metal prices in Europe are facing dual pressures as the global coronavirus outbreak deepens uncertainty over both supply and demand. As the covid-19 virus spreads to Europe, market fears are two-pronged: On the one hand, a China-style lockdown could restrict transportation of goods and services, crippling European supply chains. Reduced supply and availability could support some spot metal prices in the near term.
But on the other hand, market participants and economists expect the growing pandemic to drag down demand globally, especially in China. Look no further than China’s slumping car sales. And the demand side is where metals markets are increasingly focused as they try to navigate towards the post-virus future.
For Europe, falling demand is a big change as pre-virus, manufacturing output had been expected to turn higher in the first half of 2020, buoying industrial metals demand and prices. The current outlook is for some kind of recovery in the second half.
Downside price risk
For now, expectations point overwhelmingly to lower prices beyond the very near term.
Most buyers and sellers think the downside price risk is greater in the near term. And this is noticeable in the buying patterns in the spot metals market. European consumers, despite raising concerns over supply shortfalls of feedstock and auxiliary materials, are reluctant to stockpile and build high levels of inventory.
“The market is cautious. It is very risky to stockpile as there could be a price crash,” a trader said, which would slash the value of purchased goods.
In the first wave, news from China over the rising number of coronavirus cases triggered supply concerns in the international markets, which sparked buying activity. With Chinese-origin material failing to reach consumers, prices rocketed.
For example, European 99.7pc grade manganese flake prices duty unpaid Rotterdam soared by around 39pc between 24 January and 13 February, rising to more than a one-year high, Argus pricing data show.
Also, in the early stages of the virus outbreak, projections of a “V” shaped recovery were widespread. That view is fading fast. Some economists think an “L” shape recovery is now the best-case scenario. This is not an outcome that would clear the big inventories of some metals and finished goods, which have built up as supply chains have stalled.
Demand destruction
Markets are reacting to the expectation of a global demand slowdown. China’s manufacturing purchasing manager index (PMI) took a nosedive to a record low of 35.7 in February 2020 because of the virus-led economic slowdown, signalling a contracting economy.
With the coronavirus spreading rapidly, the likelihood of a similar trend across the world is not far-fetched. The steel and manufacturing sectors, the main consumers of metals and alloys, are coming under further pressure.
With steel industry inventory building up and order books falling, the potential for a further softening of demand is high. Japan’s steel output fell, while Chinese mills curtailed output in February.
The already struggling European steel industry is looking to optimise production and inventory
European prices for 78-82pc grade ferro-vanadium, an alloy mainly produced in China, rallied to around $30.50/kg in early February after China shut its borders but have started to pare back gains, falling to a near one-month low early in March, Argus data show.
Cushioning the blow
Looking ahead, markets expect international governments to use policy levers to cushion the economic impact of the virus outbreak.
China is planning to introduce stimulus measures aimed at the construction sector, which is positive for steel and copper demand. Copper prices have firmed this week, although that may be more to do with traders covering short positions. But the size and timing of these stimulus measures remain unclear.
The US federal reserve has cut interest rates, but the move received a muted response. And let’s remember that very low interest rates at the start of the 2008 financial crisis continue to haunt governments.