Prices & Review

Overview (March 2020)

So much has changed in a month, in late February the novel coronavirus had reached Italy, but there was still much complacency, with the Dow at the time of last month’s Review only down 9.4 percent, it has since fallen 38.4 percent. Poor outlook for industrial demand brought down commodity prices. Oil prices fell swiftly because of a two-fold blow of gloomy demand and an oil price war triggered by Saudi Arabia after fallout with Russia, with Brent crude slipping below $23 a barrel, lowest in 18 years. This prompted investors to cash in their gold holdings while a sharp decline in industrial activity brought the silver price to its lowest in 11 years. As a response, Saudi Arabia raised its debt limit to 50% of GDP from 30% and introduced a relief package worth $32 bn for its businesses. Governments around the world have launched trillion-dollar lifeboats ($5 trillion so far) and have gone further than ever to try to rescue whole economies many of which have been forced to lockdown, with demand for non-essentials suffering an almost instant stall.
In February, markets were worried that exports of parts from China would be disrupted and that would end up restricting manufacturing in other parts of the world, but in many cases, the virus got there first. For example, swathes of the auto industry across Asia, Europe, North, South and Latin America have temporarily halted production, many announcing a 21-day halt to help slow the spread of the virus. IHS Markit expects global auto sales to decline more than 12 percent this year, compared with 2019, but the figure could be considerably higher by the time the full impact is known. Work at many construction and infrastructure projects has also stopped, as have large parts of the industry in general. The most up to date economic data about how the virus has affected an economy were the US initial jobs claims data from March 26, it showed 3.28 million new claims for unemployment, a month prior it had been 219,000. Many expect a "V"-shaped recovery, as appears to be underway in China. According to China's Ministry of Industry and Information Technology, 71.7 percent of small and midsize enterprises were back in business by late March.
However, this seems unlikely on at least two counts. Firstly, China's crackdown happened very quickly, but despite lead-time China provided, other countries are now experiencing more infections and deaths than China did, which means it may take longer to get under control. Second, there is a high risk that once the virus is brought under control while populations are locked down, the virus is likely to spread again once people return to work and social distancing ends. This means, manufacturing may lose many more days of production by the time the world has got to grips with the virus, which may have to wait until a vaccine has been found and administered. But, the metals may experience a "V"-shaped price recovery as it is not just about the demand shock, the virus is also hitting the supply chain, with government lockdowns affecting many mines, smelters and refineries, as well as transport systems. In a 'normal' downturn, production cuts can take a long time coming as no producer wants to be the first to cut, but with the virus causing production cuts, the cuts have started to be seen very early on in the downturn and the cuts could be significantly more widespread. Indeed, a lot more production could be cut than would be needed to rebalance the market. The virus has no respect for the laws of supply and demand.
What is more, with China recovering and accounting for over half of the world's consumption of metals, while also being a net importer of metal and raw material, prolonged and widespread production cuts could end up causing shortages. This is especially so as most of the metals have already seen two-to-three years of consecutive supply deficits, which means stocks are generally low. Production has been affected as countries and companies around the world have implemented various forms of temporary lockdowns, quarantines and production halts, which have led to some producers declaring force majeure. In some countries mining has been stopped, such as in Argentina, South Africa and Namibia, while in other countries some companies have halted production on a unilateral basis, some have put projects on care and maintenance and others are working at reduced rates as they work without migrant workers or within tighter safety margins. Russia, Saudi Arabia and Europe have closed their borders and only allowing essential businesses to operate, which has forced some mines and production facilities to close, while production halts have also been seen in India, Canada, New Caledonia, Madagascar, the Philippines, Bolivia and states of emergency in Peru have seen mines put of care and maintenance, with the output either suspended, or reduced, and in the DRC mining is some regions was locked down temporarily, while others can mine, but face export disruptions. Restrictions on Chinese workers returning to work in Indonesia has also affected production, but generally, mining continues, as it does in the other major mining jurisdictions of Australia and the US, although some increased state safety precautions are affecting output, as are border closures. In the US, miners are deemed essential for economic security and mining can continue. The mining majors Anglo American, Antofagasta, Codelco, Freeport and Teck Resources, amongst others, are temporarily halting or slowing some operations, thereby adversely affecting the supply of commodities at the global level.

Besides, after the two-year US/China trade war and the subdued business climate that produced, the supply chain is also believed to be relatively lean. US ten year treasury yields fell to a record low of 0.676 percent in March, but have since recovered to 0.74% and the dollar index climbed to a multi-year high of 103 -both signs that investors have been investing in the US for safety, although the dollar has since dropped back to 99, following the massive rise in unemployment. Markets are likely to remain very volatile until it becomes clearer about whether businesses and households can return to a more normal existence after the first wave of the virus has passed, or whether we will have to wait for a cure before normality returns – if the latter then markets are likely to weaken further.