Market

Unprecedented risk of COVID-19 remains impossible to predict

2020  |  February -March  |  027
  • The copper demand is expected to be cut by 500 thousand tonnes this year
  • Steel production is on its way to restoration

Humanity is facing its biggest pandemic of nearly a century. Over 1.3 million people were infected with the death toll rising to nearly 130 thousand after only four months since the first case of the novel coronavirus was recorded in Wuhan, China in December. The biggest outbreak of the virus was China’s Hubei Province, which populates 57 million residents, and later shifted to South Korea, Spain, Italy, and China. The next major cities and countries with crowded populations such as Tokyo and Singapore have started preparing for the upcoming looming pandemic. Analysts are becoming more and more certain that the peak of Covid-19 is yet to come. Economists agree that the situation will be followed by increased and prolonged economic difficulties, which makes it impossible to predict the depth of the crisis.

Lifestream of economy

The situation at hand shows that the world is more integrated now compared to a century ago. Countries have become more dependent on one another where a sneeze in China could cause an outbreak in the U.S. Which is why the IMF has agreed that an economic collapse worse than the 2008 financial crisis has started. “Nearly $90 billion has flown out of emerging markets during this Covid19 pandemic. This is way more than during the global financial crisis,” addressed Kristalina Georgieva, the Managing Director of the International Monetary Fund.

Countries around the globe agree that lockdown is the first and most effective measure. This is visible from the fact that over 2.8 billion people were quarantined by the end of March. However, the lockdown was followed by a disruption in business activities and a massive surge in unemployment. For instance, Norwegia saw the highest number of unemployed since World War II, while the Scandinavian countries had a total of over 700 thousand jobless people by April. Even in the U.S, the number of people registered for unemployment compensation jumped to 9.9 million in the second half of March. In comparison, the same number of jobless claims was recorded almost half a year after the 2008 financial crisis.

We now see an increase in economic protection measures by countries. The world’s biggest economy, the U.S has approved an additional budget worth over USD 2 trillion. Out of which, over USD 350 billion will be used to support small businesses. It also includes measures to disburse cash to low and middle-income citizens and a rise in unemployment pay. Canada also approved over CAD 250 billion in the extra budget, which the Prime Minister of Canada Justin Trudeau described as the most significant since the Second World War. Japan also announced a USD 1.9 trillion worth budget and South Korea - USD 39 billion. The authorities of France, Italy, and Spain have put forward a suggestion to draw funds from the eurozone treasury and the ECB announced to purchase EUR 1 trillion in securities. There is also a possibility of an increase in the amount. As such, countries are taking historic incentives to support the economy, and the fact that the amount can be heightened shows the depth of the crisis.

Aside from the government measures, over 40 central banks have lowered their interest rate in an attempt to boost the economy and business activities using monetary policy in the second half of March alone.

Difficulties arise in commodity outlook amid uncertainties

The Asian Development Bank has forecasted the GDP of China, the biggest consumer in the commodity market, to grow 2.3 percent this year, and Fitch Ratings expect the economic activities to fall by 1.9 percent. This will be followed by a sharp drop in commodity demand.

According to “Capital Economics”, the copper demand is expected to be cut by 500 thousand tonnes this year. As for oil, the demand may shrink by 3.8 million barrels per day as forecasted by the IHS Markit.

With the slowdown of new cases, the economy is returning to China. As of the end of March, the majority of the manufacturers have returned to normal operations. But on the other hand, the disruption continues in the commodity suppliers and every other importer. For instance, a 15-day lockdown has been launched in Peru, the world’s second-biggest copper supplier, causing a shortage in copper production. Also, the second-largest copper mine in Chile, Collahuasi has laid off over 40 percent of its employees. The copper price has collapsed by over 20 percent since the beginning of the year because of the pandemic. It seems likely that the price may hike due to the same reason as the supply disruption deepens.

Oil saw the biggest price swing during the pandemic compared to other commodities. As the population moved into lockdown and a stricter movement, the aviation industry was hit by a full-blown stop. If the situation continues, the oil demand will be cut by 20 million barrels per day or 20 percent as forecasted by the International Energy Agency. This has dragged the price of oil to its 17-year low to USD 19 per barrel. 

Compared to the peak of Covid-19 in China, steel production is on its way to restoration. Economists predict this would uplift the prices of iron ore and coking coal demand. The production of iron ore remains relatively stable in key exporters such as Australia and Brazil. Although the Chinese coal mines have started operations, the logistics and workforce are still the downside factors to China according to the Fitch Ratings. Thus, the agency predicts the coking coal import to grow further. If the prediction hits the target, the current situation will have an upside effect on Mongolia’s coal exporters.

The landscape surrounding the Covid-19 is reshaping by a day. Nobody expected the epicenter of the virus to shift from China to Europe and the U.S in just two months. It seems Donald Trump can no longer call it a “Chinese virus”. Earlier in the year, Goldman Sachs forecasted the oil price to shrink by USD 3 per barrel this year. This outlines how drastically this unprecedented situation changed the global situation. Therefore, it is highly likely that the above-mentioned economic predictions will change in the upcoming month.  



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