Logistic bottleneck in China hits metals supply chain

Extensive travel restrictions in China, aimed at halting the spread of the coronavirus, have severely disrupted the domestic base metal industry supply chain, China Nonferrous Metals Industry Association (Chinania) has said.

Operations at one of China's largest copper producers, Daye Nonferrous Metals Group, have been affected as the smelter is based in Hubei province, the epicentre of the virus outbreak, the association said in a press conference on 6 February.

Inventories of sulphuric acid, the main by-product of copper, lead and zinc smelting, are also on the rise as it cannot be delivered on time because of logistical restrictions. Smelters may be forced to reduce production capacity if sulphuric acid storage capacity is full, the association warned.

Apart from a few plants in Yunnan and Sichuan in southwestern China, chemical plants in Inner Mongolia, Shaanxi, Liaoning and Henan have no capacity to consume more sulphuric acid, even if the acid was delivered for free.

The logistics bottleneck has also disrupted the delivery of raw materials, resulting in alumina production cuts in Shandong, Shanxi, Henan, Guangxi, Guizhou and Yunnan provinces. As of 4 February, it is estimated that alumina production was reduced by 1.5m t, equivalent to 2pc of the country's total capacity.

"Logistics have been adversely affected. Non-ferrous firms are generally production enterprises with large inflows and outflows. With the epidemic spreading, various localities have adopted relevant measures to restrict travel and logistics, which has led to the bottleneck of logistics and transportation for most firms," Chinania said.

Road transport between regions in China is severely disrupted, with some switching to rail, which is operating normally. But this has strained railroad capacity, resulting in queues across the country.

"As a result, the volume of inventory at plants and in-transit stocks of copper, aluminium, lead, and zinc are more than double compared with the previous year," Chinania said.

To limit the contagion, many manufacturers have voluntarily postponed the resumption of operations after the holiday period until 10 February. But many workers were unable to return to work on time because of travel restrictions. Even if they do return to work, many of them will be in quarantine for two weeks before they can resume their duties. This is expected to delay manufacturing restarts further, which will continue to depress base metal prices.

Many downstream producers have also reported that after the lunar new year holiday, order books were significantly lower compared with the same time last year. Depending on whether the outbreak can be controlled, the situation is expected to continue reducing consumer demand.

Yoke Wong