Commodities to take bigger hit from coronavirus than from Sars: analysts
Singapore
RIPPLE effects of the novel corona-virus are being keenly felt in global commodity markets, and market observers are expecting it to have a longer and larger impact than the severe acute respiratory syndrome (Sars) outbreak in 2002 and 2003.
"The baseline is that the impact on commodities this time round is more impulsive and significant than Sars, given the fact that China's share of the world's gross domestic product (GDP) has risen from 4.2 per cent in 2003 to about 16.3 per cent now," CMC Markets analyst Margaret Yang told The Business Times on Tuesday.
Likewise, Stephen Innes, chief market strategist at AxiCorp, noted that the negative impact of the virus will "linger on longer than Sars" primarily because China's global economic footprint is much larger now.
"Using oil as an example, in 2003 China demanded 5.7 million barrels per day (bpd), and today it's nearly 14 million bpd," Mr Innes said.
In line with this, China's contribution to global metal consumption has also increased to about 50 per cent, from below 20 per cent in 2003, DBS Group Research said in an industry note on Monday.
"China's GDP growth dropped 2.9 percentage points quarter-on-quarter to 7.9 per cent in Q2 2003 after the Sars outbreak. Considering the more rapid rate of infection for the coronavirus, China's economy could face a deeper slowdown in 2020," DBS analyst Lee Eun Young wrote.
Despite its lower fatality rate than Sars, the spread of the coronavirus is faster and harder to prevent. As such, DBS expects the adverse impact of the virus to be greater than Sars, particularly as China posted high economic growth in 2003, versus decelerating growth this year.
According to DBS, metal prices took about two months to recover to pre-Sars levels. From February to April 2003, oil prices were hit harder than metals, plummeting about 30 per cent, while steel prices plunged by 19 per cent.
Indeed, as CMC Markets' Ms Yang points out, the impact of the virus on oil prices is obvious, with Brent falling over 16 per cent since the outbreak escalated on Jan 20. "This is largely because of travel bans and cancellation of flights between China and other countries, which dampened the prospect of energy demand," she added.
Moreover, Wuhan is a mega Chinese city and the centre for various industries, including automobiles. This means that any supply chain and logistics breakdown and extended CNY holidays would lead to contraction in economic activities and a reduction in commodity demand, DBS said. Accordingly, it has revised its metal price forecasts down by about 2 to 3 per cent, especially for copper and steel, whose "fortunes are tied to the macro picture", the brokerage explained.
Meanwhile, gold and silver prices will continue to be buoyed by favourable investment sentiment, riding on their status as safe-haven assets, DBS said. Expectations of a persistent low interest rate environment should also bolster their prices, and DBS has revised its price forecasts for gold and silver up by 2 per cent each.
Despite the bank's conservative view on the commodity market, DBS expects there to be bargain hunting opportunities at the peak of the outbreak. It envisions that this peak could come within one to two months, if there is no significant community spread in regions other than Wuhan.
