SMM Hot News: Impact of the coronavirus outbreak on China metals market

Summary

SMM has undertaken further surveys covering the impact of the current issues in China on physical metals markets. While processors and end users remain offline expecting to come back next week, albeit at reduced operating rates given the uncertainty on order books, so far production impacts at the smelter/mill level are minimal while producers continue to assess the evolving situation. The major disruptions right now are being felt more on logistics, which is starting to hamper smelters supplies and shipments of many raw materials. A lack of sulphuric acid storage capacity at zinc and copper smelters in particular is likely to hamper their ability to maintain production unless the logistics situation is eased soon. 

Domestic miners are also heavily impacted, some by a shortage of labour post the holidays, and most again by logistics constraints resulting in rising inventory. Alumina refining in a number of areas in particular is suffering from logistics issues for both bauxite arrivals and shipping out their alumina. This is already resulting in higher alumina prices in some regions and may ultimately constrain aluminium production. 

Our teams will continue to monitor the situation as it evolves and we will have more updates soon.

Copper

Logistics: Shipments of imported copper concentrate from ports to smelters have been little affected, while shipments of other materials for copper production met transport restrictions, especially at borders between provinces. Logistical issues are also affecting sales and deliveries of copper cathode and sulphuric acid. That, coupled with a lack of labour force as people are deterred from travelling back to work, is expected to affect copper production in February. Logistical issues are also likely to beleaguer downstream copper processors in terms of both raw materials and finished goods, after they resume operations.    

Inventories: With shipments of imported materials feeling limited impact and ample in-plant stocks, copper smelters now see stable copper concentrate supply, while potential restrictions on deliveries of copper cathode and sulphuric acid are likely to lift inventories of finished stocks at smelters and slow supply to downstream consumers, leading to production curtailments. 

Resumption: While copper smelters have maintained normal production since the Chinese New Year holidays, raw material, copper cathode and sulphuric acid logistical issues amid transport restrictions may force smelters to trim output. For copper processors, some are awaiting further notice from authorities on whether they can resume production from February 10. Many Chinese cities, municipalities or provinces have announced that businesses are not to resume work earlier than midnight February 9. Copper processers are likely to curtail production after their reopening, as orders are also postponed with some of their clients delaying resumption even later. Logistics concerns will also likely prompt copper processors to cut production.      

Trading: Trading activity is expected to be thin after the Shanghai Futures Exchange reopened on February 3 as some traders will not return to work till February 9. SMM learned that most traders will work from home this week, and go to the office in turn. Domestic trades have resumed somewhat, while foreign trades remain muted. 

Prices: The coronavirus outbreak looks set to take a toll on copper demand, while the impact on copper supply remains to be seen. That leaves China’s copper market to be oversupplied in the near term, weighing on copper prices. SMM data showed that social inventories of copper in China’s major trading markets—Shanghai, Jiangsu, and Guangdong—increased 65,000 mt from January 23, to 280,000 mt as of Monday February 3. With coronavirus fears unnerving investors, gold prices surged while stocks plummeted and LME copper sank to five-month lows. Copper prices are likely to rally if there are signs of easing in the epidemic outbreak, as the metal has a bullish narrative when it comes to fundamentals. 

Aluminium

Alumina: Road transport constraints have slowed deliveries of caustic soda liquid, bauxite and other feedstock for alumina to refineries. This grows the chances of alumina production curtailments as some alumina refineries in north-central China’s Shanxi province told SMM that they only have limited stockpiles of raw materials after the extended CNY holidays. On the other hand, alumina refineries see their inventories of finished goods growing as road transport capacity from regions like Shanxi and Henan to regions like Xinjiang, Gansu and Qinghai have decreased with drivers delaying their return to work. The extended holidays and road transport capacity shrinkage prompted alumina consumers—primary aluminium producers—to step up purchases from warehouses located near railways or ports, pushing alumina prices higher. Some aluminium producers offered 2,500 yuan/mt to buy alumina on February 3. Although there were not large transactions done at that price, alumina refineries are poised to hike their quotes. 

Primary aluminium: Social inventories of primary aluminium ingots in China increased 194,000 mt or 28.1% from January 23 to 884,000 mt as of February 3, showed SMM data. Arrivals during this year’s CNY holiday that was extended by three days due to the coronavirus epidemic outbreak, grew by the most compared to previous CNY holidays in the last five years. The coronavirus outbreak is expected to have limited impact on primary aluminium production as producers have been operating normally and as new projects did not sharply show down their ramp-up. Some primary aluminium producers in Xinjiang and Inner Mongolia told SMM that consumption of molten aluminium will remain low as the holidays are extended. This is likely to keep supply of aluminium ingots at highs, lifting inventories at major consumption areas. 

Aluminium products: The extension of holidays across aluminium processors will deter them from purchasing aluminium ingots in the first week of February, delaying aluminium consumption. That is the impact of the epidemic on aluminium consumption in the short term. An SMM survey showed that aluminium plate/sheet, strip and foil producers in Henan, extruders in Guangdong and processors in Jiangsu and Zhejiang will extend their holidays by up to 10 days. Some regions will extend the holidays by at least two weeks. From a longer-term perspective, the hit of the epidemic outbreak on end-markets such as property, automobiles and home appliances which are major consumers of aluminium are set to finally pass on to consumption of primary aluminium.   

Prices: Spot trades in east China like Jiangsu, Zhejiang and Shanghai and south China’s Guangdong have resumed, but the trading activity was weaker than the same period after last year’s CNY holiday, as downstream processors have yet to reopen and as logistical constraints deter primary aluminium ingots from leaving social warehouses. Concerns about the impact of the epidemic outbreak on aluminium consumption and higher inventories led to a decline of 3.5% in futures prices on the first trading day after the CNY holidays. SHFE aluminium tumbled 495 yuan/mt to 13,605 yuan/mt on Monday, even as night trading was suspended. Aluminium prices are expected to remain weak in the short run, as coronavirus fears linger.  

Zinc

Industry chain: Mines have maintained normal production, but ore deliveries to smelters felt impact, growing the possibility of a raw material shortage at smelters that could affect production. Some smelters told SMM that their sulphuric acid tanks are not big enough to store their output. That is likely to prompt some smelters to trim production or lower operating rates. Smelters also see their inventories of refined zinc increasing as downstream consumers have yet to resume work and logistical constraints deter cargoes from moving to social warehouses. An SMM survey showed that most zinc processors are not allowed to resume operations earlier than midnight February 9. This, together with poor orders from end-users, will keep zinc processors from buying zinc ingots, even as they may buy the dips before they resume work next week. Most of end-market enterprises are required to resume work no earlier than midnight February 9, and the resumption schedule various from region to region. Infrastructure and property builders are likely to step up operations to catch up to their plans, after they resume operations. Countries are likely to cut their imports from China after the World Health Organization declared the novel coronavirus outbreak as a public health emergency of international concern, which dampens prospects of zinc end-market exports in the first half of 2020.

Inventories: With the epidemic slowing logistics, refined zinc stocks at smelters are likely to continue to increase, while gains in social warehouses will be moderate. SMM data showed that social inventories of refined zinc across Shanghai, Tianjin, Guangdong, Jiangsu, Zhejiang, Shandong and Hebei increased 60,000 mt from January 23 to stand at 189,000 mt as of Monday February 3, which was largely in line with expectations. As logistical services recover, inventories of refined zinc across social warehouses are likely to grow faster, and to see a cumulative increase of 110,000-120,000 mt. Deliveries from port warehouses also took a hit from the slow logistical service recovery amid the coronavirus epidemic.

Prices: A potentially sharp increase in zinc social inventories are likely to further hammer zinc prices, after the recovery of logistical services allows cargoes to move from smelters to social warehouses. 

Downstream orders: Most of downstream processors in China will extend their holidays through February 9, and processors in different regions will decide the date of resumption according to local authorities. Infrastructure and property projects are likely to step up operations to meet their original plans after they resume operations, which will drive consumption of zinc. 

Lead

Medium and large-scale lead smelters in Henan and Hunan maintained normal operations during the CNY holiday, while some other producers underwent maintenance or shut down for the holidays. In the secondary lead sector, some large-scale smelters maintained staggered operations during CNY holiday, while other smelters halted production for at least half a month, with the resumption originally scheduled between February 1 and 8. The coronavirus outbreak delayed the posy-holiday resumption of some smelters, as required by local governments. 

Chinese government extended the CNY holiday to February 2 nationally, and to February 9 for Jiangsu, Zhejiang, Guangdong, Shanghai, Tianjin and some other major production-oriented provinces/cities, in order to avoid a further escalation in the disease outbreak.

As SMM surveyed, lead-acid battery producers in Zhejiang and Jiangsu have postponed their resumption date to February 9, from the initially indicated February 1. Some producers in severely afflicted areas said they will not resume earlier than February 17. 

Most lead-acid battery distributors and retail sellers also planned to extend the holidays to February 8, and some distributors said they will resume operations based on the virus development. 

Downstream stockpiling reduced the social inventories of lead ingots across Shanghai, Guangdong, Zhejiang, Jiangsu and Tianjin to 29,000 mt before the holiday. The market is expected to see an inventory buildup of more than 20,000 mt post-holiday, SMM assessed based on production across the chain over the CNY holiday and postponed recovery of downstream demand. In-plant inventories at smelters will account for most of the increase.

Transportation issues will determine whether lead social inventories will be able to accumulate in the first week post-holiday. Most provinces and cities have suspended inter-provincial and inter-city transportation due to the epidemic outbreak. 

The estimated increase in lead inventories is likely to keep lead prices weak in February. Speculative actions on the back of the virus outbreak may add to the downside risk of lead prices in the first half of the month. SMM expects three-month LME lead to trade between $ 1,800-1,890/mt this week, with the most-active SHFE contract at 13,950-14,550 yuan/mt. Lead prices may stem decline if the coronavirus is effectively contained and allow the release of pent-up demand with downstream lead-acid producers recovering operations.

Nickel

China’s production of refined nickel declined in January, primarily affected by the CNY holiday and lower production at major producers, rather than the virus epidemic issue. 

According to SMM survey, refined nickel plants in Gansu, Xinjiang, and Shandong are running normally. A few producers in some other areas lowered production due to the disease outbreak, and will not resume normal production before February 9. The resumption schedule remains unclear for two producers that are currently in suspension, and significant production from them may unlikely to see in February. 

The near-term operating rates at NPI producers are likely to decline on the back of tight supply of nickel ore and disrupted shipments from Inner Mongolia on virus issues. 

Operations at ports remain affected as most provinces and cities extended the CNY holidays to February 9. Most ports in China did not see arrivals or discharging of nickel ore during the holidays, while only a small number of ports saw arrivals and a slight buildup of port inventories.

The amount of nickel ore delivered from ports was even smaller, and the shipments were mostly intra-provincial level. Railway transportation was in normal operations. Road transport was largely halted due to the epidemic, but it may gradually recover this week. 

While the virus may only affect stainless steel production by 6% in January-February, the logistics problem caused by the outbreak will have a greater impact in the stainless steel sector. According to SMM survey, market participants are not optimistic about stainless steel production in February, forecasting that more than 20% of domestic output will be impacted this month.  The ongoing city lockdown in Hubei province and some nearby areas keeps production staff from returning to work. This adds to difficulties for stainless steel plants to recover full capacity when the extended holiday ends on February 9. 

Downstream consumption, especially the demand for consumer goods was affected significantly by coronavirus. These included stainless steel products (building and decoration materials, tableware and equipment), electroplate products (automotive and bathroom accessories), and batteries for cars and digital devices. The consumption of nickel and stainless steel in China concentrates in the southern and the eastern regions, which have high population densities and are under more stringent epidemic prevention measures than in North China. This could account for the considerate impact on demand for consumer products due to the outbreak. 

Steel 

Most blast furnace steelmakers delayed their formal resumption to February 3. Electric arc furnace (EAF) steel mills, meanwhile, already saw losses before the CNY holiday. A decline in spot steel prices expanded their losses to 357 yuan/mt as of February 3, SMM assessed. Production at EAF steel mills was already weaker before the holiday, especially for steel plants in East China, Central China and South China, while the additional shortage of staff due to travel restrictions and raw material logistics issues will keep operating rates of EAF steel mills from rebounding. 

According to SMM research, steel mills in Hubei and Hunan whose raw materials procurement or business scope involves Hubei, the epicenter of the virus outbreak, may see their raw materials being able to sustain production for only a month. Their production will shrink significantly in March if the virus fails to be contained. In terms of steel varieties, construction steel may see a greater impact on the supply due to the scaling back operation of EAF steelmakers. 

Authorities of cities or provinces including Beijing, Zhejiang, Shanghai, Jiangsu, Guangdong, Hubei, Anhui, Fujian, Chongqing, Inner Mongolia, Henan, Hebei, and Guizhou have announced that enterprises should not resume work earlier than 24:00 CST on February 9. That came after the nationwide extension of the Chinese New Year Holiday by three days to February 2. Real estate enterprises in Changsha were also required to extend the holiday to February 8. Taiyuan has postponed the construction recovery for new projects that commenced before the CNY holiday until after March 1, and property sales are also stagnant. 

The downstream resumption in most regions has been postponed by 10 days, and areas with severe epidemic may see further delay. This will significantly weigh on demand for steel in February, and a consumption pickup is seen between end-February and the first half of March. 

Rebar inventories have accumulated as the epidemic halted market trades in the middle of the CNY holiday and the holidays were extended by 3-10 days from the usual seven days. SMM data indicated that, overall rebar inventories in China stood at 11.73 million mt as of February 3, 40.4% higher than January 23, and 12.1% higher than a year earlier. The inventory buildup at steel mills was faster than that in social warehouses due to shipping restrictions, which will be lifted gradually from February 10. SMM expects production cuts at steel mills in the near term as warehouses at ports and steel plants may soon reach storage limits. 

In Shanghai, small ports will remain closed till February 10 as required by the government, while major ports operate normally. However, the epidemic restricts automobile transportation as well as the arrival and unloading of small vessels at ports, which resulted in vessels that arrived during the CNY holiday backlogging at ports for 5-10 days. The shipping price varied at Shanghai ports, according to the shipping companies. For vessels blocked at ports for more than 3 days, the cargoes on board are subject to demurrage charges of 1 yuan/mt. 

In Lecong of Guangdong, small ports will reopen on February 10 while major ports are in normal operations. Major ports have seen full storage of goods due to great arrivals during the holidays and disrupted unloading and transportation at ports amid virus outbreak. Large ports have recently stopped to accept new ships, and the acceptance will resume after the recovery of road transportation. The condition of the current barge is that the loading and unloading period does not exceed 4 days, and a demurrage fee of 2 yuan/mt is imposed after 4 days. 

Cargoes backlogging at destination ports caused a shortage of vessels at the departure ports, which saw the piling up cargoes at ports of departure close to the storage limits. Transportation restrictions also added to inventory pressure at steel plants. Most steelmakers expect their storage capacity will only be able to meet the demand for about a week. Absence of improvement for transportation may prompt steel plants to cut output. 

The impact of extended CNY holiday on the demand outweighs that on the supply, which raises the risks that oversupply may accelerate the decline in futures prices this month, before the release of pent-up demand after the virus ultimately leads to recovery in prices. Supportive policies from the Chinese government may also help to trigger a price rally after the impact of the epidemic. A turning point in the virus development will be determinant for steel prices in the near term. 

Tin

While China relies on Myanmar for tin ore imports, the virus has affected tin ore shipments and production at the Wa State of Myanmar. The resumption is scheduled on February 10, and normal trade flows are expected in the second half of February. 

China's tin smelters are mainly located in Yunnan and Jiangxi. Most tin smelters remain in the suspension of quotation and sales, and only a few smelters returned from the holidays. The market is likely to resume sales after February 10, given the requirements by the governments of Yunnan, Jiangxi, and Shanghai, and the current warehousing and logistics services that have yet to fully recover. 

The downstream sectors of tin are primarily soldering and electronics. Most of the tin processing enterprises are located in South China with great volumes of exports. Resumption of tin downstream producers is also slated after February 10. The actual recovery will depend on the epidemic situation and the resumption of warehousing and logistics services. 

China’s refined tin production over the holidays is expected to fall from a year earlier, due to maintenance at smelters and the tight supply of tin ore. Inventory increase at smelters during the holidays will also be smaller from last year. SHFE tin inventories stood at a relatively high level of 6,995 mt as of January 23. Prices of tin are likely to face downward pressure on near-term greater supplies than demand, as it requires time for downstream demand to pick up after the holidays.