If you want to track the damage being done to global economic activity and growth by the coronavirus, just keep an eye on commodity prices and declarations of force majeure by Chinese companies. Both are showing increasing signs of the stress.
With one of China’s major manufacturing centres and transport and logistics hubs locked down and nearly 40,000 people in China already infected, the virus is having an increasingly more chilling effect on economic activity there.
That in turn is flowing through to demand for the raw materials and disrupting the supply chains that feed the world’s largest manufacturing centre.
China’s Council for the Promotion of International Trade, which issues force majeure certifications – documents that validate a company’s claim that it can’t meet its contractual obligations because of events it couldn’t have foreseen and therefore are beyond its control – has said it has received more than a thousand inquiries about the certificates from Chinese companies.
China’s biggest LNG buyer, China National Offshore Oil Corp, invoked force majeure in relation to long-term contracts to buy gas from France’s Total and Royal Dutch Shell, although Total has said it rejected the notification. Shipments of LNG are being cancelled or delayed.
A copper smelter, Guangxi Nanguo, has also declared force majeure, along with an auto parts manufacturer.
As the virus continues to spread, more of China’s factories are freezing production which will inevitably mean further reduced demand for commodities and more attempts to use the force majeure option to rescind contracts.
Not surprisingly, the impact of the virus on commodities is reflected in both shipping activity and commodity prices.
Industries across Australia are feeling the pinch as the deadly coronavirus affects exports and travel.
The Baltic Dry Index, which tracks freight rates for the world’s largest dry bulk carriers and is regarded as a bellwether for international shipping activity levels and global economic conditions more generally, is at all-time lows. It has plunged more than 83 per cent since its peak last September.
Bloomberg’s Commodity Index is down more than 8 per cent over the past month, with oil, iron ore and copper prices all tumbling as the impact of the virus on people and economies becomes increasingly apparent.
The oil price has fallen nearly 18 per cent this year, from just under $US70 a barrel to $US54.47 a barrel. Copper is down more than 11 per cent and iron ore, which was trading around $US95 a tonne in mid-January, has tumbled almost 14 per cent to less than $US82 a tonne.
China is the world’s largest oil importer – it imported more than 10 million barrels a day last year – and represents nearly 40 per cent of the growth in demand. Its big refiners are cutting production and some smaller independents have shut down. Stocks of gasoline and jet fuel are mounting as travel restrictions tighten.
With some estimates that its demand will fall by more than 25 per cent this month – more than 3 million barrels a day, or 3 per cent of global demand – and the spillover effects to global shipping and travel mounting, the oil price probably provides as good a guide to the economic impact of the virus as any of the commodities. It is increasingly damaging.
The plunge in oil prices and the uncertainty about the ultimate impact and duration of the epidemic has created a quandary for OPEC and its affiliates.
OPEC+, as the wider group is known, agreed last December to a more than 500,000 barrels-a -day production cut for the March quarter this year to put a floor under oil prices.
Only a week ago a special meeting of its joint technical committee proposed a further 600,000 barrels a day cut for the June quarter but, with Russia yet to respond and members of the cartel yet to even agree to meet before next month, there is no certainty the cuts will eventuate. Without more production cuts the price could fall further.
What the virus means for China’s trade truce with the US, under which it agreed to buy an extra $US200 billion of US products this year and next, including an extra $US50 billion of energy commodities, is anyone’s guess.
Unless the virus is brought under control quickly, an already ambitious target would become near-impossible.
There are some "get out" clauses in that deal for events beyond China’s control (the coronavirus would certainly qualify as an unforeseeable event) but the fractured relationship between the US and China and the politics of the Trump administration’s perceived victory in the trade war means that a passive US acceptance of China’s inability to meet its commitments can’t be taken for granted