SMM Hot News-China Metal Special Report 4: Impact of COVID-19 on China metals market

SHANGHAI, Feb 13 (SMM) –

As business activity starts to resume after the extended holiday, activity levels remain subdued. Quarantine regulations mean anyone moving between provinces need to be self-quarantined at home for 14 days, while areas of central China remain locked down. Our Shanghai office, for example, has only about 20% of staff in the office this week, with most working from home, and this is effecting all industries.

Our channel checks suggest trading activity is starting to return in most areas, and overall confidence in future demand remains solid with the government clearly sending out a supportive message towards economic support in the face of the disruption. Activity at end users is varied across industries and regions however, with many requiring government permission to restart such as is Guangdong.

It remains too early to say whether there is any aggregate demand loss, but clearly activity remains subdued and demand will be delayed. Inventory is rising for most metals, but given this is still normal for this post CNY period markets appear unperturbed for now.

Transportation restrictions remain the main disruptor in the market currently, with backlogs building at many ports, and smelters and mines in many internal provinces in particular struggling to move material around as we have discussed previously.

Please see below for more details on the impact to each metal, and don’t forget to join our webinar on the latest impact from the virus, and a deep dive into aluminium supply chain, tomorrow ( February 14) at 5PM China time. Book your slots by following this link https://register.gotowebinar.com/register/441778679228901644

New Energy

COVID-19 impact further delayed resumption of cobalt and lithium industry chain 

Cobalt: China's cobalt raw materials supply highly relies on imports, and the export destinations of Chinese smelting and primary processed products are Japan and South Korea. The export trade of cobalt products will take a hit as China is badly hit by the COVID-19 epidemic.

On the other hand, imports saw a less significant impact, while measures that have been taken to contain the spreading of COVID-19 and logistics restrictions have delayed the imports of raw materials by a week. Major smelters continued to produce over the Chinese New Year holiday, while resumption of some other plants was delayed till February 10. Actual recovery date will be based on official regulations. 

Lithium: Seaborne lithium ore currently accounts for more than 60% of the raw materials used to produce lithium salts in China, but the proportion will decline with the development of lithium extraction technology from salt lake and mica.  COVID-19 epidemic is expected to cause a limited impact on China’s imports of lithium raw materials, on the back of the oversupply of global lithium ore. Almost all lithium smelters had suspended operations or were on maintenance during the CNY holiday. Some smelters had plans to extend suspension for as long as two months, after taking into account their inventory level and outlook for the downstream demand recovery.

While major smelters in Qinghai were immune from the COVID-19 impact, smelters in other regions planned to delay their recovery till after February 10, and adjustments will be made based on the resumption of logistics services.

Battery materials: Some of the factories resumed work progressively from February 10, with an average delay by 10 days. In Hubei, the epicentre of the epidemic, resumption of operations by smelters was not granted approval , while a handful of companies may resume operations this weekend. In Zhejiang, where most Chinese precursor producers are located, producers need to submit applications for plant recovery, and the first batch of producers are able to reopen this week. Producers that file the application on or before February 17 are expected to resume production on February 24. Factories in Guangdong will be under review for recovery this week, while some production lines are expected to resume operations. Production in Hunan resumed on February 10 as factories reported to local authorities in advance, while factories in Jiangxi are allowed to resume operations on February 17 due to relatively greater impact from COVID-19. 

Lithium salt inventory in Qinghai increased, cobalt salt producers to destock in February

Cobalt: Raw material inventories at smelters are likely to meet production demand until the second half of March as an upward trend in overseas cobalt prices prompted smelters to stockpile large quantities of cobalt intermediate products. But the COVID-19 outbreak may delay the arrival of import products by a week. 

Market participants told SMM that feedstock restocked by some factories before the CNY holiday could be able to ensure production till the beginning of March. Cargo arrivals originally due in mid-February will be affected, while deliveries due between end-February and March may see limited impact given smaller import volumes. 

Cobalt salt inventories piled up at smelters for most of the second half of 2019. Producers held back cargoes from the market after downstream pre-holiday stockpiling, and some producers cut production post-CNY due to COVID-19 impact. Cobalt salt plants are expected to destock in February. In the long run, prices of cobalt chloride will outperform that of cobalt sulphate on the prospects for downstream demand. 

Lithium: The global lithium fundamentals currently remain in oversupply as lithium miners, ports, and smelters are all holding some lithium ore inventories. Inventory levels are likely to rise in the short term as the epidemic delays the resumption of downstream demand. Inventories will eventually return to normal levels as miners have been actively clearing out stocks. 

Prices of industrial-grade lithium carbonate may be under pressure in the first half of the year as stable operations of smelters in Qinghai and disrupted shipments and subdued downstream demand amid COVID-19 fears grow the inventory turnover days by 1-2 months. In-plant stocks at smelters in other regions are controllable as smelters halted production according to the downstream demand.

Lithium salts inventories at downstream material producers stood at low levels as previous falling prices of lithium kept consumers from restocking. Purchases of lithium salts are expected to resume to normal by end-February if downstream plants resume operations on as scheduled after February 10. Relatively low inventories of quality battery-grade lithium hydroxide, together with disrupted production amid COVID-19 outbreak deterred cargo delivery. SMM expects orders to recover once the production normalises. 

Battery materials: Purchasing demand increased from major material producers that maintained operations during the holidays, on the back of depleting raw materials inventories. This is expected to buoy prices of cobalt salts and ternary precursors in the near term. Battery mills postponed their resumption till next week. Small and medium-scale producers currently have inventories that can meet production need this month. Some large producers had purchased large quantities of low-cost raw materials pre-holiday, which could be able to meet demand this month.

Delayed post-holiday recovery to bring February production less than expected

Cobalt: Orders from smelters remained subdued on COVID-19 impact. However, a continued price rally in overseas cobalt offers boosted the prospects for domestic cobalt prices. Enquiries for cobalt salts improved as the inventory stockpiled pre-holiday by downstream producers mostly depleted, while upstream producers continued to hold offers at high levels. Orders are expected to rebound once the epidemic eases and the transaction curbs are lifted. SMM expects production of cobalt salts and cobalt (II, III) oxide in China to fall 30% on the month in February. Producers of lithium cobalt oxide (LCO) mostly recovered on February 10, and their output is estimated to slip 40% in February.

Lithium: Most lithium salt plants have reopened but the recovery of the operating rate will be slow, as the return of workers remains restricted to contain the spreading of the COVID-19 virus. This may see China’s lithium salt production 40% lower on the month in February. Some downstream material producers kept part of the capacity running during the CNY holidays and planned to purchase lithium salt this week. Lithium salt prices may decline slightly if logistics restrictions remain in place. 

Battery materials: Cobalt prices in overseas markets rose 1.5% during the CNY holiday, which supported bullish sentiment in the domestic market, and is likely to buoy post-holiday prices of ternary precursors and ternary materials. But the upside room in cobalt prices could be capped as virus fears dampen the demand outlook in the first quarter.

Downstream demand for lithium iron phosphate (LFP) will remain subdued this month. While producers in Shenzhen and Guizhou generated output and stroke a small number of deals, producers in other areas have not returned from the holidays. Production duration this month will be only two-thirds of the original plan as the epidemic delayed the post-holiday resumption. Overall production is expected to halve on the month in February.

Logistics issue and downstream demand are the major headwinds for the recovery of the industry chain. The ongoing lockdown in Hubei province resulted in traffic stagnation, and traffic restrictions in some other areas disrupted trans-provincial shipments. Transportation curbs have been partially lifted since February 10, but virus development will be determinant for further recovery. Cargo deliveries remain constrained by logistics issues. This, coupled with postponed recovery of most downstream producers, kept orders and enquires sluggish in the market. 

Rare earth

Rare earth companies in China have not fully operational amid the ongoing COVID-19 outbreak, showed an SMM survey as of Wednesday, February 12. China Northern Rare Earth said that its raw material unit did not suspend production, while other departments have partially recovered. Most of the upstream smelting and separation enterprises have resumed operations, but are not in full capacity. Some of the downstream magnets producers have resumed production, and overall production recovery is subdued.

In terms of trading, the rare earth market in China remained muted amid the COVID-19 epidemic and logistics constraints, as some cities were locked down to contain the epidemic. Upstream light, medium and heavy rare earth producers and traders have hiked their offers from levels seen before the Chinese New Year holiday (January 23), but inquiries or purchases by downstream consumers were muted. Downstream consumers are likely to step up procurement only after resumption of logistics services.

Last weekend, China’s Ministry of Transport said that road and waterway projects, except for Hubei and regions that are severely affected by COVID-19, should aim to resume construction by February 20.Key projects should also commence as soon as possible, the ministry added in a statement on its website.

The order by central authorities increased expectations on the recovery of logistics after February 20. By then, workers will be able to return to work after being quarantined for 14 days, which will help ease manpower shortages.

In the short term, production and sales in the rare earth upstream and downstream industry chain in China are expected to recover and commence normal operations after February 20. Demand is likely to pick up after downstream consumers have depleted their stockpiles, which will give a short-term boost to rare earth prices.

Minor metals

The main producing areas of minor metals, such as antimony, bismuth, indium, selenium, tellurium and magnesium, are mostly located in Hunan, Guangxi, Guangdong, Yunnan, Shaanxi, and Shanxi, where the resumption of production and trades has been delayed due to the ongoing COVID-19 epidemic.

For antimony, main producing areas like Hunan and Guangdong saw massive shutdowns of smelters, as the two regions have been relatively severely hit by the epidemic. In Hunan, the leading producer Hsikwang Shan Twinkling Star’s antimony smelter has suspended, and its antimony oxide production line has yet to resume. Production is likely to recover gradually after March 1. 

Chenzhou Mining, another leading producer in Hunan, is currently operating at a rate of just about 30%. Limited output forced the company to curb sales, as its current output is unable to fulfil long-term supply agreements. Other antimony producers in Hunan are also struggling to resume production, as some have yet to receive the approval from local authorities to resume operations. 

Meanwhile, the suspension of mines in China and logistics constraints on transport amid the COVID-19 outbreak are affecting supply of raw materials, which is also a headwind against production resumption. Other major producing areas such as Guangxi and Yunnan are also facing similar situations. Although Yunnan is not so severely hit by COVID-19 compare to other regions, the factories have also been required to delay resumption. In view of low inventories of finished goods, antimony producers are likely to increase their quotes while holding back sales.

Logistics constraints have hit the deliveries from bismuth and indium producers in the main producing area of Hunan, while supply of raw materials felt limited impact amid sufficient stockpiles replenished before the CNY holiday. Bismuth producers in Yongxing of Quzhou city received scarce inquiries from downstream consumers, as consumers are mostly located out of Hunan. Given the existing ban on trans-provincial transportation, delivery time for cargoes out of Hunan remains uncertain.

Most bismuth and indium producers did not suspend production during the CNY holiday, SMM learned. This, coupled with mounting sales pressure amid logistics constraints, has lifted inventories of finished goods at many smelters, even they did not operate fully during the CNY holiday. Subdued exports and sell-off by bearish traders also added to sales pressure on bismuth and indium producers. Producers are likely to lower their offers in the near term.

On the other hand, offers for magnesium ingots increased significantly as supply tightened. Some magnesium producers have stocks of finished goods, but could not make deliveries due to transportation restrictions. Magnesium ingot producers in Shanxi’s Wenxi county are limitedly impacted and maintain production, while plants in Shaanxi, which is bordered by Hubei, the epicentre of COVID-19, remain shut. As most of workers at magnesium ingot producers in Shaanxi are from other regions they are required to be quarantined before returning to work. Aside from manpower issues, raw material shortages are also preventing producers from recovering production. Most of magnesium ingot producers in Shaanxi are heard to keep their machines switched on during this period, and operating rates are just around 3-4%.

Most of magnesium ingot consumers have delayed their resumption in view of raw material shortages and logistics constraints. Transportation costs have risen sharply and it takes a long time to get the approval for to transport goods in between provinces. Production of magnesium ingots in China is set to decline significantly this month, and a full recovery in production is expected to happen around end February to early March. It is estimated to take 10 days for producers that keep their machines switched on to recover capacity after restrictions are lifted, while the time would be 10-15 days for those who are currently shut down.

Further Reading

SMM Webinar Series: Coronavirus Special Impact on the China metals market- Aluminium supply chain (Feb 12,2020)

SMM Hot News-China Metal Special Report 3: Impact of the coronavirus outbreak on China metals market (Feb 12,2020)

Iron ore demand fell as virus outbreak sent more steel mills into maintenance  (Feb 12,2020)

Spot copper concentrate TCs hit 8-month high amid coronavirus outbreak (Feb 12, 2020)

China car imports fell 2% in 2019: CADA (Feb 10, 2020)

Exclusive: China's base metals output in January (Feb 7, 2020)