Com­modi­ties mar­kets on edge

Rip­ple ef­fect from deadly coro­n­avirus also dis­rupt­ing sup­ply chains

Baltimore Sun - - ENTERTAINM­ENT - By Matt Phillips

In Aus­tralia, af­ter haul­ing hun­dreds of thou­sands of tons of iron ore to China, re­turn­ing freighters can face a 14-day quar­an­tine be­fore be­ing able to reload.

BHP, which has head­quar­ters in Lon­don and Melbourne and is one of the world’s largest cop­per min­ing com­pa­nies, has been in talks to pos­si­bly de­lay ship­ments to Chi­nese ports.

And from Qatar to In­done­sia, ex­porters of liq­ue­fied nat­u­ral gas face the prospect of dis­rupted ship­ments af­ter a cru­cial importer in China is re­port­edly turn­ing back de­liv­er­ies af­ter in­vok­ing clauses in longterm con­tracts that blame a “greater force.”

The coro­n­avirus out­break in China has gen­er­ated eco­nomic waves that are rock­ing global com­modi­ties mar­kets and dis­rupt­ing the sup­ply net­works that act as the back­bone of the global econ­omy.

“We’re see­ing a rip­pling out,” said Ed Morse, the global leader of com­modi­ties re­search at Cit­i­group in New York. “And we don’t see it stop­ping.”

Prices for key in­dus­trial raw ma­te­ri­als such as cop­per, iron ore, nickel, alu­minum and liq­ue­fied nat­u­ral gas have plum­meted since the virus emerged. Cur­ren­cies of coun­tries that ex­port these goods at high rates, in­clud­ing Brazil, South Africa and Aus­tralia, are near their low­est lev­els in re­cent mem­ory. And man­u­fac­tur­ers, min­ing com­pa­nies and com­mod­ity pro­duc­ers of all stripes are weigh­ing whether they will be forced to cut back on pro­duc­tion for fear of adding to a grow­ing in­ven­tory glut.

The woes of the com­modi­ties mar­kets — ar­guably the worst-performing as­set in fi­nan­cial mar­kets this year — re­flect the ba­sic re­al­ity that China’s in­dus­try-heavy econ­omy is the most important con­sumer of raw ma­te­ri­als on Earth.

And dras­tic ef­forts to quell the out­break, in­clud­ing a lock­down of the epi­demic’s epi­cen­ter, Wuhan, a city of 11 mil­lion people, and se­vere cur­tail­ment of trans­porta­tion na­tion­wide, have slowed the Chi­nese econ­omy sharply.

JPMor­gan econ­o­mists now think China’s econ­omy will grow at a pace of just 1% in the first quar­ter, well down from an ini­tial fore­cast that an­tic­i­pated a 6.3% rate.

The slow­down will be most pro­nounced in the in­dus­trial sec­tor. Most Chi­nese prov­inces had ex­tended the Lu­nar New Year holiday and kept fac­to­ries closed un­til Mon­day in an ef­fort to con­tain the virus.

Some have re­opened, but it could be weeks or months be­fore pro­duc­tion can fully ramp up.

That is a chal­lenge for the sup­ply chains that have de­vel­oped in re­cent decades to de­liver a con­stant sup­ply of the ma­te­ri­als that make Chi­nese fac­to­ries hum.

Com­modi­ties mar­kets have tum­bled as those fac­to­ries idled. Iron ore is down more than 10% this year. Cop­per is down about 8%, as is nickel, a key in­gre­di­ent for stain­less steel. Zinc and alu­minum are both down more than 5% in 2020.

Whether the down­turn is a blip or a se­ri­ous shock is as much a ques­tion of epi­demi­ol­ogy as eco­nom­ics.

If the spread of the virus starts to slow, as many ex­pect it will, com­modi­ties will most likely re­bound as pro­duc­tion re­turns to nor­mal and in­ven­to­ries that have been built up over the past few weeks grad­u­ally shrink.

Oth­ers are not so sure.

Cit­i­group’s Morse said sev­eral key mar­kets — like crude oil — had al­ready been show­ing soft­ness, sug­gest­ing that the global econ­omy was weak even be­fore the virus hit. That could com­pli­cate any quick re­bound for com­modi­ties prices.

“The mar­ket has been think­ing that there’s going to be a V-shaped re­cov­ery at some point,” he said. “And we don’t think that’s in the cards.”

YUYANG LIU/THE NEW YORK TIMES

China’s econ­omy will grow 1% in the first quar­ter, down from an ini­tial fore­cast of 6.3%, econ­o­mists say amid the virus out­break.

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