Coronavirus impacts copper market prices
Trains and flights have been cancelled with road checkpoints. As a result, land freight, especially inter-provincial transportation, has been significantly affected.
Since its initial outbreak in Wuhan, China, the novel coronavirus (2019-nCoV has quickly spread to other global cities, striking international concerns over the virus' impact on world health and economy. On Jan. 30, the World Health Organisation declared a public health emergency, and there have been more than 28,000 diagnosed cases since then.
In response to the outbreak, China has taken a number of measures to contain the spread of the virus: All the cities in Hubei Province are quarantined; Chinese New Year holiday was extended by three days; and many local governments are extending the delay, with many companies having to resume working at a later date, e.g., 10 February.
As a result, logistics and people movement have been impacted. Trains and flights have been cancelled with (several) checkpoints set up on the roads. Land freight, especially inter-provincial transportation, has also been significantly affected.
Given the rapid development of this public health crisis, the following insight from Wood Mackenzie's copper market team is a more qualitative look at the impact of the corona virus on the copper market.
Copper Supply: Operations continue at Chinese smelters but acid is a big risk
Limited impact on smelter and refinery production for now Unlike copper fabricators, smelters and refineries did not stop operating over the Chinese New Year national holidays (this is common practice in China and consistent with previous years). Even the extended holidays and the reduced number of employees able to return to work has had little impact on smelter and refinery operations. However, this does not mean there are no risks to smelter production. The two main concerns are around the raw material freight movement and acid sales.
Freight of concentrate to Daye continues, but taking longer
The Daye smelter and refinery is located in Huangshi, Hubei province, producing 500 ktpa refined copper, including 300 ktpa primary production and 200 ktpa from purchased blister and anode. As all the cities in Hubei Province have been quarantined, Daye is the largest smelter of concern among the Chinese operations. Concentrates are typically shipped to Huangshi Port along the Yangtse River and then trucked to the smelter. From what we have heard, it is taking longer for concentrates to reach the smelter but as yet there has been no impact on its production. Aside from concentrate freight, what we are hearing from the market is that there is a general loss of efficiency across the concentrates supply chain from ports to smelters due to restrictions on movement and extension of holidays for couriers, customs brokers, customs, etc. Delay in delivery of concentrates is also being experienced by many other smelters in China.
Acid is a big threat to smelter production
According to our estimates, for a tonne of primary copper production, Chinese copper smelters are producing an average of 3.6 tonnes of sulphuric acid. It is critical for copper smelters to sell and ship the acid before acid storage is full, otherwise copper production will be impacted and in extreme cases suspended. Hubei is the largest phosphate fertiliser producer in China, the most important downstream product of sulphuric acid. We understand Hubei accounts for roughly 20 percent of total sulphuric acid consumption in China, which it sources from local smelters as well as those in neighbouring provinces, including Jiangxi, Anhui and Henan.
As all the cities in Hubei are quarantined, the utilisation rate of acid consumers in Hubei has declined and many smelters are now having difficulties selling their acid. We have heard that in some cases, smelters can find a buyer for their acid, but are finding it difficult to ship the acid due to the impact on the supply chains due to the virus. As a result, acid inventories at smelters are rising. In general, smelters in most provinces in China have a challenge selling their acid given the state of the domestic fertiliser industry and the Governments’ aim to achieve zero growth in fertiliser usage in China in 2020. Some coastal smelters have been more than happy to export their acid at FOB $0/t if they can, given that there is no domestic demand – this was already the case in the latter part of 2019. According to one major primary smelter, if the acid disposal situation does not improve over next few weeks they will have to cut the utilisation rate by 30 percent. Other smelters have expressed the same view, albeit they did not provide a time frame.
Disruption already seen at some smelters
As pressure on acid storage mount, Guixi, the largest smelter in China, started to reduce the amount of concentrate charged into the furnace in the first week in February. Due to the high inventory of acid and difficulties obtaining some other consumables, Tongling Nonferrous started to reduce utilisation rates at its smelters in the city of Tongling, i.e. Tongling Jinchang (Ausmelt), Tongling Jinguan and Jinlong. We understand that utilisation rates have been reduced to 70-90 percent at these smelters. How long production cut backs will last or whether there will be further curtailments will depend on when the state of emergency, due to the virus, will be revoked.
Elsewhere in China, one of the major primary smelters in East China has had significant difficulties obtaining imported concentrates trucked to site from the port. Due to a lack of concentrate, the smelter has started its maintenance ahead of schedule. The maintenance, which was originally scheduled for March, started by the end of January and is expected to last for roughly 30 days. If the coronavirus situation is drawing to a close before maintenance is completed, and concentrate deliveries can be resumed, there should be minimal impact on production from this smelter. At another inland smelter, purchased concentrate has not been able to be delivered. Currently this smelter is relying on the inventories on site, but from discussions we had they seem optimistic that the transportation issues can be solved before production is impacted.
As the time of writing, smelters cutting production have a total primary capacity of 2.7 Mtpa, with another 1.7 Mtpa primary smelting capacity at risk. Acid related problems is the biggest threat to smelter production under current circumstances. According to current situation, the primary production loss is over 60 kt contained copper in February assuming smelting capacity at risk all maintain full operation. Going forward, if the epidemic can be brought under control in March, the loss of production could be partially compensated for over the rest of year. But if the state of emergency continues, the smelters will have to further reduce utilisation rates and more smelters will have to cut production.
Construction of new projects will be delayed Under the impact of the state of emergency, construction in China has been suspended. We have identified two copper projects that are facing risks of delay. Chifeng Jinjian’s 260 ktpa relocation was scheduled to be commissioned in H2 2020. The engineering work is being carried out by the China 15th Metallurgical Construction Group, which is a Wuhan-based company. We understand it is unlikely that the company will get this work done as scheduled and the commissioning of the project will probably be delayed. The other project at risk is Daye Xingang, a 400 kt double flash in Huangshi, Hubei Province. The construction was started in 2019 and expected to be completed by the end of 2021. The construction is now suspended, and it remains unclear when it could be resumed. We understand it will probably be delayed into 2022.
Delayed restarts of copper first-use demand after the Chinese New Year holidays As required by local governments, most of the semis fabricators in China will delay production until 10 February, except plants in Hubei province that will have extended disruption. The delayed restarts of semis plants will no doubt negatively impact China’s first-use copper demand. The good news is that there is limited semis capacity in Hubei province (300kt wire rod and 100kt plate/sheet/strip). China has sufficient capacity of semis in other provinces that a prolonged suspension in Hubei will not limit the recovery of copper demand. In addition, most semis fabricators usually run at reduced utilisation rates until the end of the second week after Chinese New Year. Therefore, the direct impact of the delayed restarts will be less than one-week of Chinese copper demand. However, the indirect impact and the downside risks on demand could be much larger.
Restricted movement of people will bring further disruptions to end-use copper demand As things stand, most workers returning from their hometown will need to stay at home for a 14 day incubation period. Even after the incubation period is over, people are being asked to refrain from travel to public places. This does not include the ~60 million people in Hubei province who are restricted from travelling for a much longer time. Under the circumstances, electrical network and construction projects are likely to be delayed. Hence demand for machinery, especially construction machinery, could also be muted. It is also hard to imagine Chinese households will have an appetite for consumer durables such as cars and home appliances, for a while. Most shopping malls are either closed or only open for a very short period every day. Online shopping has also been reduced to the minimum volume as delivery workers and couriers are unable to return to work.
Muted end-use demand will hurt utilisation rates at copper semis fabricators A few semis fabricators that we have been able to contact mentioned that they will be operating at lower utilisation rates compared to previous years after the restarts on 10 February. This reflects fewer customer orders compared to the normal level of orders in Q1. We believe that this will be the case for most of the semis plants in China until the health crisis comes to an end.
Cathode stock to increase at both domestic and bonded warehouses Stock levels in both SHFE and Shanghai bonded warehouses usually drop to low levels by the end of December in the previous year, and rise to peak by the end of March in the new year. Therefore, the stock change during Q1 reflects the slower pace of demand during the Chinese New Year in a normal year. Due to the coronavirus, we believe that the disruptions to cathode demand side will be more significant than the supply side. This means that copper cathode stock in domestic market will increase more than the normal levels this quarter. The SHFE stock increased by ~140kt in Q1 2019. Shipments of cathode have continued to arrive in Shanghai bonded warehouses over January. Imports and deliveries from the bonded area to the domestic market will remain limited due to the lacklustre domestic demand and reduced road transportation. Therefore, inventories at Shanghai bonded warehouse is also expected to increase more than 150kt, which was the stock change seen over Q1 2019. If the situation continues for longer, we will most probably start to see rerouting of cathode shipments to other global warehouses.
How long will it take for things to return to normal? As we understand, the delayed starts across sectors were ordered, in most cases, by local governments. Therefore, it is possible that an overall restart of the industrial sector gets further delayed if the situation worsens in the coming days and weeks. Even under our most optimistic estimates that the situation starts to improve, it will probably take 1-2 months for everything to return to normal. If China loses one month of copper demand, this means a reduction of more than one million tonnes of refined copper demand. However, some of the loss in copper demand, especially the demand from consumer durables, should be able to be clawed back later in the year if the health crisis dissipates in the first quarter. On the other hand, demand loss from infrastructure and construction sector will be harder to make-up; best case scenario is that it would be delayed to later this year. As a result, we believe that there is now a significant downside risk to our forecast of 0.9 percent Chinese total copper consumption growth for 2020.
Comparing the Coronavirus to SARS in 2003 Many have tried to compare the current coronavirus outbreak to SARS (or Severe Acute Respiratory Syndrome) in 2003 to gauge the impact of the current crisis on economic growth and copper demand. However, we found that a direct comparison is not easy and not that relevant for the following four reasons. First, China was in a very different stage of its economic development, and the country accounted for 19% of the global total copper consumption back then as opposed to 47 percent in 2019. Therefore, the impact of SARS on the global copper market was limited. Second, SARS emerged as a national health emergency in April 2003 when most people had returned to their working cities from the Chinese New Year Holiday. Therefore, the disruptions on industrial activities were more limited than the Coronavirus. Third, the disruption on consumption from SARS was mainly focused on Guangdong province and Beijing, but Coronavirus is now spreading to most of the economic centres in China. Fourth, China was more reliant on semis imports in 2003 with total copper consumption of 3,846 kt and semis imports of 1,013 kt. Therefore, the impact on China’s domestic semis production was less during SARS when there is a slowdown in the country’s end-use demand.
Impact of SARS on global copper market
SARS emerged around April 2003 and the initial impact on the market and prices was another bout of uncertainty and the threat this may pose to economic growth, especially in Asian markets, and particularly China. This was in addition to the tensions in Iraq around that time. The uncertainty over SARS clearly had a negative impact on most markets, including copper, at a time of the year when the copper market is usually at its strongest. Sentiment in the markets was affected further when the IMF announced that it had cut its 2003 global forecast to 3.2 percent from 3.7 percent because of the war in Iraq.
By May 2003, the Chinese central bank declared that the economic impact of the outbreak of SARS in Asia would be limited, meaning it was unlikely that the uncertainty generated by the virus would hamper economic growth in China. Although there was evidence to suggest that the SARS virus was having a detrimental effect on some areas of the Chinese economy, namely tourism, there was limited impact within the country’s copper sector. This is particularly true of demand for copper semis where output during the first four months of the year rose by 30.6 percent year-on-year. Undoubtedly the country’s buoyant auto sector, which had seen production surge annually by 110 percent during the same four-month period, was largely responsible for this growth.
Notwithstanding some understandable slowdown in the Chinese economy resulting from the SARS epidemic (such as: retail sales in May grew at their slowest rate while industrial production improved, but at its slowest pace in nine months), overall, the economy continued to grow quite strongly which was reflected in healthy demand for copper. By July/August 2003 the worst of the SARS crisis was over, which helped to lift exports, especially for electrical appliances. Domestic demand was backed by the continual upgrading of the country’s rural power grid, thereby boosting demand for copper wire and cable. In addition, the steady improvement in the country’s standard of living led to an increase in the demand of copper consuming goods such as autos, electrical appliances, air conditioner units etc. This was backed by an increase in Chinese semis production in 2003 which was up 27 percent from 2002 levels. As the year progressed it became evident that the impact of the SARS virus on the region's demand growth for copper was fairly limited.
On the supply side, in 2003 there was a significant increase in smelter capacity growth in China and there was no apparent impact on production due to SARS. Production was supported by strong imports of raw materials: During 2003 China imported 2.67 Mwmt of copper concentrates, comfortably exceeding prior year receipts by 29.3 percent. Chinese copper scrap imports rose by only 2.6% in 2003, to 3.16 Mt. However, when looking at the value terms of these gross weight imports, the implied copper content for 2003 appears to have risen by 9 percent, year-on-year. Chinese blister imports of 123.3 kt also reflected a healthy 16.9 percent gain on 2002 levels. Chinese refined copper imports rose by 14.7 percent in 2003 to 2.99Mt.