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Our Materials Price Index (MPI) fell 2.5% last week, declining
broadly once again as fears of the spreading coronavirus and its
potential impact on the Chinese economy triggered selling across
markets. The MPI is down roughly 3.5% in the past two weeks, with
commodity prices as measured by the index now lower than a year
ago.
Although Chinese markets were closed last week for the normal
Lunar New Year celebration, global exchanges continued to trade,
with oil and base metals seeing heavy selling. Copper's 7.0% plunge
caused the MPI's non-ferrous metals index to end the week down
5.6%. More importantly, it suggests a sharp drop in manufacturing
activity. The MPI's energy index fell 4.2% mainly from a large
decline in crude oil prices. Brent fell 5.8% last week to $58.7
/bbl. on estimates that Chinese demand may fall as much as 0.5
Mbbl/d while travel bans remain in place. Brent prices are now down
13.7% since the first week of January. Rubber prices retreated 6.3%
last week despite the current supply crunch in South-east Asia and
the Chinese auto industry showing some growth in December. Freight
and ferrous prices also fell 3.7% and 1.4%, respectively. Ocean
going freight rates are now absorbing news that both inbound and
outbound cargoes are likely be affected by disruptions to Chinese
production.
With the effects of the coronavirus now carrying past the
traditional New Year holiday week in China, damage to the Chinese
economy becomes an order of magnitude greater. Commodity markets
are pricing in a sizeable reduction in aggregate Chinese demand
with an impact on global markets greater than during the SARS
outbreak 15 years ago. The questions now are how long do Chinese
factories remain idle and, on the demand side, how much consumer
spending is lost?
Posted 05 February 2020 by Mr. William May, Senior Economist Pricing and Purchasing