FOCUS: Second wave of Covid-19 infections will hit global commodities ‘even harder’

A second wave of Covid-19 infections will hit the global commodities markets even harder than the initial outbreak, market sources told Fastmarkets on Monday May 11.

Five new infections have surfaced in the Chinese city of Wuhan where the outbreak first came to light, while 11 new cases have been recorded in Shulan city in Jilin province.
And in the South Korean capital Seoul, the authorities are scrambling to trace thousands of people linked to a cluster of new cases, while Germany's virus reproduction rate - the average number of people infected by one person - has increased to more than one following a resurgence in cases after lockdown measures were eased in its 16 federal states on April 20.
The fear of a big resurgence in Covid-19 infections has soured sentiment among market participants, who mostly hold dour views about the impact of the outbreak on the key ferrous commodities markets in Asia.
Another round of price falls
Most market participants said they expected prices to fall further because demand will be hit hard again.
“Hot-rolled coil price falls of up to $50 per tonne may even happen, judging by how prices moved in the first half of this year,” a source at a major east Asian HRC producer told Fastmarkets.
Major downstream end users in the automotive and construction drastically reduced demand during the first wave of Covid-19 infections, including stoppages at automotive lines operated by major producers Toyota, Hyundai, Tesla, Nissan, Seat, Ford, Daimler and Volvo in Japan, South Korea, the United Kingdom, France and Germany.
A source at a second major east Asian HRC producer, however, was much more optimistic about price trends if a second wave was to occur.
“Prices are already very low in the current environment and have already eaten into mill margins,” the producer source said. “In fact, prices have reached the bottom and are now rebounding. That is why prices will not suffer any more - even if there is a second wave.” 
A Vietnamese trader said the measures implemented by governments should hold national economies in better stead.
“There should be more confidence among market participants about how businesses handle the coronavirus crisis if it was to surface again,” the trader told Fastmarkets.
Vietnam has seen only 288 cases of Covid-19 and no deaths, and has largely relaxed social distancing and lockdown measures -, although gatherings of large groups are still prohibited.
The first HRC producer source questioned whether such a positive outlook was justifiable, however.
“Prices are indeed at a bottom right now,” he said, “but only if there is no second wave of infections hitting the global economies hard.” 
Changes in trade flows... again
Trade flows will certainly be disrupted again if the second wave spreads, sources said.
“Typical trade flows have already been heavily disrupted by the first wave of Covid-19. For example, China has turned out to be one of the few bright sparks in the spot market,” a steel trader in southeast Asia said.
China has been purchasing large quantities of HRC in recent weeks, soaking up almost half a million tonnes of HRC from Russia, India, Japan and South Korea due to plunging domestic demand in those countries, according to Fastmarkets' statistics.
This is due to the high local prices caused by a rebound in demand, along with traders hedging against the short selling of futures cargoes on exchanges, such as the Shanghai Futures Exchange.
China is typically an exporter of HRC to regional buyers because of short shipping times, and especially to countries where it has free-trade agreements in Southeast Asia.
China's production purchasing managers index (PMI) dipped slightly to 50.8 points in April, down from 52 points in March, according to the National Bureau of Statistics. The PMI had been a dismal 35.7 points in February, the month the Covid-19 pandemic took hold.
“China's domestic markets remain bullish, with decreasing inventory levels in many areas. Many market participants feel that China's domestic prices will remain higher, which is why Chinese traders are buying imported HRC to hedge against the high domestic prices,” a Chinese steel market observer said.
China is also expected to implement a more-aggressive monetary stimulus program in the coming months, ING China chief economist Iris Pang said in an analyst note on May 11.
“We expected there will be more focused credit injections to small and medium enterprizes, which should help employment,” she said.
Pang expects China to cut the reserve requirement ratio for big banks to 9.5% from 12.5% by the end of 2020. She also expects the seven-day reverse repo rate - a kind of short-term loan that the central bank uses to increase liquidity in the national banking system - to be cut to 1.5% from 2.2%.
Market sources in China said they expected things to look up in the domestic market for the rest of May, especially with the downstream construction industry increasing its activities and with a rebound in automobile sales widely expected.
Higher costs for manufacturers
Steel mills and stockists expect to see higher costs in the implementation of the Covid-19 measures mandated by national governments at their production plants.
This includes fewer workers in attendance at meltshops and fabrication facilities due to social distancing measures at steel mills, tracking worker movements and health screenings and temperature testing, which could all reduce production rates.
“The cost of worker accommodation and transportation are also likely to increase, due to staggered working arrangements and shift systems,” a steel buyer in Singapore said.
Singapore has seen huge jump in Covid-19 infections among its construction workforce residing at purpose-built dormitories, causing almost all construction sites to shut down.
The gradual restart of construction projects will also slow demand and the quantities sold to construction companies, dampening margins further, the buyer said.
Key factors to watch out for
There are a number of factors to watch out for, according to market participants.
“A big part of how commodity markets will [react] depends on the major international ferrous markets in Europe, the United States, Russia and Turkey," a steel trader in Singapore said. “We need to watch out carefully for any resurgence in Covid-19 infections in these countries and how [their] governments react to the new cases.”
If these markets recover and domestic demand improves, then buyers in these countries will start sourcing imported cargoes again. If not, it is likely the economic slump will persist, the trader said.
The new rounds of safeguard measures being implemented by many countries will also disrupt trade flows in the medium term.
"With the European Union looking to start anti-dumping investigations against Turkish hot rolled coil and Turkey increasing its steel import duties, it doesn't look too good for Asia," the trader added.
Similarly, weak domestic demand in Russia and India would be equally bad for the Asian HRC markets, a second steel trader in southeast Asia said.
"Look at how Russian and Indian HRC have been flowing to Asia [recently],” he said.  “The situation will worsen once more supply from Hoa Phat's new integrated steel mill comes on stream. Vietnam will become an even smaller market," he said.

Paul Lim

paul.lim@fastmarkets.com

Published

Paul Lim

May 11, 2020

16:56 GMT

Singapore