The coronavirus is expected to have a limited impact on global upstream cost markets
In light of COVID-19's aggressive spread since this post's publication, governments' unprecedented measures to stop this spread and Saudi Arabia's initiation of an oil-price war in March, our findings have changed. Please refer to our latest posts on upstream capital and operating costs and you are welcome to contact us if you have further questions.
Coronavirus (COVID-19) is expected to have a limited, downwards impact on the Upstream Capital Cost Index (UCCI) and Upstream Operating Cost Index (UOCI), IHS Markit's proprietary metrics for tracking the costs of constructing and operating global upstream projects. While the effects on the indices themselves will be low, we expect China's influence on these changes to be material due to the country's position as one of the world's largest producers and consumers of goods.
Short-term labor shortages resulting from the virus will likely contribute to reduced productivity and project delays. In the medium-term, Chinese wages in the UOCI and Asian regional wages in the UCCI were both projected to increase about 3% in 2020 but these estimates will likely be lowered once the full extent of the COVID-19 outbreak is determined.
Steel is another crucial commodity for the upstream sector, with China as its largest producer. Prior to the outbreak, Chinese steel prices were expected to remain flat in 2020 due to high inventory levels and weakening demand, but our preliminary analysis indicates this outlook could be revised downwards depending on how long the outbreak lasts and how quickly the Chinese economy recovers.
Presently, we believe the flattening prices for Chinese steel will constrain costs of manufacturing certain spare parts, reducing the likelihood of increases in maintenance pricing. The reduced output from China may also present an opportunity for other countries' producers to gain market share while securing favourable pricing.
Bulk material (e.g. cement, paint) markets are also expected to be negatively impacted by the COVID-19 outbreak since China and Asia in general account for such a large portion of supply and demand. However, the impact from the virus does not change the markets' already weak situation: demand for these commodities had been dropping for some time, and falling commodity prices since mid-January indicate that markets continue to expect this ongoing decrease in demand to outweigh the decrease in supply from China due to the virus.
Within mainland China, logistics and manufacturing have undoubtedly been impacted by the government's response to COVID-19, and fuel prices specifically fall in periods of lower demand. This development should be short because containment measures are presently expected to be limited.
Learn more about IHS Markit's Upstream Costs & Expenditures service.
Kate Ashcroft is a director with the Costs and
Technology team, leading the Upstream Operating Costs Service at
Anuj Kadakia is a Senior Research Analyst in the Cost and Technology team at IHS Markit.
Jeff Nitto is a Senior Research Analyst with the Upstream Costs and Technology team at IHS Markit.
Jeff Otten is a Research Analyst with the Upstream Capital and Downstream Costs services at IHS Markit.
Pritesh Patel heads cost of technology research in the Upstream Research team at IHS Markit.
Posted 24 February 2020.
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