Lower auto output to weigh on metals demand

An expected fall in China's automotive production caused by the coronavirus outbreak is expected to weigh on demand for many minor metals and rare earths.

Domestic auto sales are forecast to fall by more than 25pc in the first two months of this year because of the coronavirus crisis, according to secretary-general of the China passenger car association, Cui Dongshu.

The coronavirus has killed nearly 570 and sickened over 28,000 people in China as of 6 February, according to official figures. The government has extended the lunar new year holiday to 9-10 February in most regions in an attempt to contain the spread of the coronavirus.

Authorities in Hubei province, the epicentre of the outbreak, have ordered companies to postpone output restarts to at least 13 February. Hubei is a manufacturing and transportation hub, with automotive output accounting for 9.9pc of China's total production in 2019.

The auto industrial chain has stalled, as many suppliers of auto parts and components are located in Hubei. Auto producers in Wuhan city, including Dongfeng Motor's joint ventures with Renault, Honda and PSA, have not announced when their production will resume. The closures are likely to continue after 13 February if the health crisis worsens.

Hubei is one of the main auto markets in China. The government's quarantine measures will reduce auto sales in February as many car dealers are unable to carry out marketing activities. Buying interest from consumers is expected to weaken as the coronavirus crisis has affected the economy and is likely to reduce income levels.

China's automotive sales dropped by 8pc in 2019 amid a slower economy, according to data from the China association of automobile manufacturers. It forecast at the end of 2019 that auto sales would fall by 2pc in 2020, but the decline is likely to be even bigger because of disruptions from the spread of the coronavirus.

The expected fall in auto output is likely to weigh on demand for magnesium. Magnesium is a key material in auto production as it is a lightweight structural metal with a density two-thirds that of aluminium, two-fifths of titanium and a quarter of steel. Magnesium alloy usage is expected to rise to 20kg in each vehicle in China, up from 8.8kg in 2017.

Demand for several rare earths including praseodymium, neodymium, dysprosium and terbium will be also affected as they are used to make permanent magnets. A fuel vehicle typically consumes 1.5-2 kg of permanent magnets, according to industry estimates. Each new energy vehicle requires around 2.5-5kg of rare earth magnets, which contain about 28pc of praseodymium-neodymium. Rare earth permanent magnets are a key consumer of rare earths, accounting for 65pc of the world's consumption.

Lower auto output is also expected to affect the demand for battery metals such as lithium and cobalt.

China's auto production and sales are expected to return to normal in March if the coronavirus outbreak comes under control, said Cui. More urban residents are expected to buy a car to avoid public transport, to prevent future viral infections, he said.