Socio - Economic Lockdown Intensifies Fear of Global Recession

Posted on 6th April 2020 by Dr. Hanish Kumar Sinha, Deputy Vice President - Research & Development, NBHC

Copper in the recent times is making preparations for the worst possible situation since 2011 as the coronavirus outbreak shut down swathes of the global economy, reducing need for metals.The uncertainty brought by the coronavirus outbreak has continued to hit the copper market, with prices falling significantly while miners step up their response to slow down the spread of the novel virus.This year’s supply is expected to suffer as a result, with countries also imposing restrictions on operations around the world to fight the virus.The on ground situation is changing very quickly, and numerous major operations are reducing workforces, delaying construction or ramp up activities, and a fair amount of smaller operations have been placed on care and maintenance. The key thing to watch is any signs that virus containment measures across the world being relaxed which would indirectly support the growth and revival of economic activity.

The supply and the demand cycle of the copper market is being moving forward under stressed situations.Global copper mine production is expected to see a steady growth over the next few years, as a number of new projects and expansions come online, supported by rising copper prices and demand.Global copper production in 2020 is impacted by the covid-19 outbreak and is expected to grow at a slower pace of 1.9 per cent against earlier expectation of 3.4 per cent.The pandemic outbreak has led to suspension of various expansion projects. This pandemic has led to the situation, where Chile’s copper miner Codelco may not regain its position as the world’s top producer of the red metal this year, as delays in upgrades and expansion projects caused by measures to stop the spread of the novel coronavirus add to the impact of low prices and lack of funding.With demand contracting and price plummeting on economic supply response now seems likely. The disruption caused by virus containment has been the catalyst for a quicker reaction than is typical by the mining industry in a downturn. So far, the COVID-19 closures are temporary. However, with prices low, the decision to restart will become difficult for some producers. Furthermore, the longer the prices stay depressed, marginal mining operations, not currently disrupted by coronavirus, may be forced to cut production regardless of their size & scale. The reach of coronavirus has rapidly expanded from key regions of copper demand – China and Europe, to key regions of supply.In the Americas, Peru has enforced widespread quarantine, and some mines are now thought to be on temporary care and maintenance.In Chile, a state of catastrophe has been declared.In Peru, the government has taken measures to prevent the spread of the pandemic throughout the mining industry. Mining companies have been asked to only mobilise critical employees to mine sites, to implement an emergency plan adapted to the circumstances. A slide in copper demand is expected to fuel a surplus this year of up to a million tonnes in what had previously been expected to be a balanced market, with the loss of consumption from key buyers likely greater than the decline in supply due to coronavirus-related disruption.

The concern here comes down to global macro weakness. While some of the softer trends in demand in 2019 were blamed on the U.S.-China trade war, the situation now is the risk of a major global recession with the pandemic COVID-19 outbreak. While it's recognized that China represents 49 per cent of copper consumption annually, the unique challenges in 2020 highlight headwinds for all other regions including Europe. On the demand side, the construction sector, which accounts for 40-45 per cent of the global demand, is likely to be heavily impacted by the covid-19 related restrictions and lockdowns.The direct impact on construction has been the halting of work – with labour unable to get to the construction sites – and disruption to supply chains with delays in the delivery of key materials and equipment, due to quarantines and travel restrictions. Widespread postponement and cancellations of projects are also expected. Even as Asia slowly reopens after its lockdown, factories there risk running short on supplies as the virus spreads to countries that produce vital raw materials. There is a bigger issue than in Africa, which provides the metals and minerals needed for just about every industrial product, and where countries heavily reliant on trade with China have been suffering from a collapse in commodity prices.

With the coronavirus pandemic bringing much of the global manufacturing sector, especially key copper-consuming industries like automotive, to a grinding halt, a demand-and-supply imbalance in the copper market is inevitable.With the coronavirus pandemic bringing much of the global manufacturing sector, especially key copper-consuming industries like automotive, to a grinding halt, a demand-and-supply imbalance in the copper market is inevitable.Governments in China, the United Kingdom, the U.S. and elsewhere have passed stimulus plans that promise big spending on paper, but how much of that will go into the basic materials and red metals sectors is unclear. This pandemic would draw away momentum from electric vehicles (EVs), which had begun to capture growing market share heading into the epidemic. EVs use significant amounts of copper and also require a charging infrastructure partially depending on copper cables and wires.Government incentives and mandates in many parts of the world could nonetheless revive the EV segment once drivers are again ready to seek new vehicles in the aftermath of COVID-19.

Taking advantage of the lower international prices, India turned out to be a net importer of copper so far in this fiscal. Japan accounted for 77 per cent of total imports during the current financial year, mainly because of India’s preferential trade deal with the country. There is 5 per cent import duty on import of finished copper products but India enjoys preferential tariff of 0.9 per cent on imports of cathodes from Japan under the FTA. With the inventory keeps piling up at the global market place owing to the outbreak of Coronavirus in China – the major consumer of copper – the price of copper is set to fall further, which in turn see further rise in imports. With the global demand from the European, Middle East and the US markets likely to remain muted for the next one quarter, the prices of most of the base-metals may remain subdued, owing to significant demand-supply disruptions.

Copper traders are trying simultaneously to track both highly dynamic demand and supply drivers. There should be no doubting the scale of the demand shock coursing through the world’s industrial nations. Purchasing Managers Indices (PMI) just about everywhere has collapsed as manufacturing activity goes into deep freeze.The one exception is China, where life is slowly getting back to something close to normal after an apparently successful containment of the coronavirus.Assessing a market balance in the face of such fast-moving events is very much a work in progress. The consensus is that the demand shock will be bigger than the supply shock, but by how much is a moot point.Headline bounces in China’s March PMIs masked weakness in the export orders component of both the official and Caixin indices is guiding the global economy to positivity but since the COVID-19 pandemic is a global phenomenon with its own fast-changing dynamics, attempting to understand its economic impact means monitoring just about every country on earth.

Dr. Hanish Kumar Sinha
Deputy Vice President - Research & Development
National Bulk Handling Corporation Pvt. Ltd.

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