Iron ore. Picture: REUTERS
Iron ore. Picture: REUTERS

Launceston — It is no surprise that commodity prices in China were hammered on Monday when the virus-hit country reopened its exchanges after a weeklong Lunar New Year holiday. What will be more important is what happens on Tuesday.

It was a sea of red ink as domestic investors got to trade for the first time since January 23, with Dalian Commodity Exchange (DCE) iron ore dropping the maximum allowed 8% to 606.5 yuan ($86.64) a tonne at the opening bell.

Iron ore was not the only commodity smashed. Shanghai steel rebar futures reached their down limit of 8% as well, dropping to 3,233 yuan a tonne before recovering slightly in early afternoon trading to about 3,260 yuan.

Shanghai copper slumped to its maximum daily limit, before recovering to trade at 44,880 a tonne two hours after the opening bell, down 6.8% from the close on January 23.

The sharp losses were always likely when trade in China resumed, given the declines elsewhere in the world during the time that China’s markets were shuttered. The main question is what is likely to happen next.

Shanghai copper may offer some clues. While it did drop by the maximum allowed initially on Monday, it did recover a touch as the day progressed.

By early afternoon trade on Monday, the Shanghai contract has taken a bigger hit than the losses incurred by benchmark London copper, which has dropped 6% since the close on January 23 to trade at about $5,623 a tonne on Monday.

This suggests that the Chinese markets may simply play catch up to the losses elsewhere in the globe, rather than go beyond them and spark a new wave of selling.

Much will depend, of course, on signs of progress in combating the coronavirus outbreak, which started in the central China city of Wuhan and has spread to more than two dozen other countries.

Thermal coal outlier

The virus has claimed at least 361 deaths in China, and a man in the Philippines became the first victim to die outside China, after travelling to the Southeast Asian nation from Wuhan.

While medical knowledge of the new virus is still being accumulated, initial signs are that it is spreading more rapidly than the 2003 outbreak of the Severe Acute Respiratory Syndrome (SARS), though causing fewer fatalities.

It is likely that commodity prices will remain under pressure until financial markets are assured that the spread of the Wuhan virus is under control.

At that point commodity markets may turn their focus to how much demand has actually been lost in China and elsewhere, and how strong the bounce back in activity is likely to be.

It is also likely that authorities in Beijing will announce more stimulus measures to boost China’s economy once the virus is controlled.

China’s central bank said it would inject 1.2-trillion yuan ($174bn) of liquidity into the markets via reverse repo operations on Monday, and it is likely that additional stimulus measures will be announced.

Also key will be how quickly the authorities allow normal activities to resume, such as reopening schools, offices and factories.

It is worth noting not all Chinese commodities were losers on Monday, with thermal coal futures on the Zhengzhou Commodity Exchange posting a modest 2.6% gain in early trade.

This reflects concern that thermal coal supplies, mainly used by power plants, may be constrained by ongoing mine closures as part of efforts to curb the spread of the coronavirus.

While electricity demand is certain to take a hit from the curtailment of manufacturing and other economic activities, it is also possible that lower mine output and challenges in transporting the fuel may tighten domestic coal supplies.

The small gain in China's thermal coal contracts is a reminder that markets are seldom all one-way traffic, but for now the price action is still dependent on news headlines on the progress of the virus epidemic. 

Reuters