China’s surging Covid Omicron outbreak and growing lockdowns of big cities and factories – especially in the major tech and export zone of Shenzhen – saw commodity prices tumble Monday and Tuesday morning.
The weakness came despite an apparent truce in the nickel trading debacle that has stopped trading in the metal for the past week but will see it resume on Wednesday.
That was news that should have added to market confidence instead it was the worsening Covid outbreaks and lockdowns that sent shares and commodity prices lower.
Thermal coal, oil, copper, gold, iron ore, silver and grains all fell on fears the worst outbreak of Covid since the original pandemic in early 2020 would shut the Chinese economy once again.
Oil prices fell by more than 6% with US West Texas Intermediate type crude trading around $US102 a barrel – it had peaked a week ago above $US130 a barrel and Brent, the global marker crude ended around $US106 a barrel – it too had peaked above $US130 a week ago at more than $US139 a barrel, the highest since 2008.
Iron ore prices tumbled more than 6% with prices on the Singapore Exchange futures market around $US146 a tonne. Comex copper lost 2.5% to $US4.50 a pound, Gold dropped to $US1,953 at the close on Comex, a fall of 1.6%. Silver was also weaker.
Chicago wheat lost nearly 2% to end at $US10.92 a bushel. Fears of a Midwest drought are starting to add to the volatility caused by the loss of Russian and Ukranian grain supplies.
Given the weakness in commodities, it’s no wonder the overnight share price index futures was showing a 61-point fall for the ASX 200 at the opening on Tuesday.
The commodities-heavy Toronto Exchange in Canada saw its biggest fall in seven weeks on Monday.
But traders will again be watching the nickel contract on the London Metal Exchange where the LME plans to restart trading on Wednesday. That will end a week-long hiatus while the situation was sorted out.
It seems a truce in the shape of a standstill agreement has been struck between the Chinese company at the centre of the trading debacle, Tsingshan Holding and its banks.
Banks including JPMorgan Chase and Standard Chartered have agreed not to close out Tsingshan’s position or make further margin calls — demands for extra cash to cover losses.
The Financial Times reported that other bank counterparties to Tsingshan’s huge (and failed) bet on lower nickel prices are Chinese lenders ICBC and China Construction Bank which means the Chinese government has been involved in the talks.
The standstill agreement will give the two sides time to reach a deal on a new secured credit facility that the world’s biggest stainless-steel producer can use for its “nickel margin and settlement requirements”.
In a rare public statement, the privately owned company said an “integral feature” of the agreement was a “provision for the existing hedge positions to be reduced by the Tsingshan Group in a fair and orderly manner as abnormal market conditions subside”.
The LME suspended dealings in nickel last Tuesday and cancelled thousands of trades after its benchmark contract doubled to a record above $US100,000 a tonne, bringing global trading in the metal to a halt.
The LME plans to resume trading at 8am on Wednesday (London time) and will introduce daily price limits for all of its metals including nickel. Members will also be asked to disclose all Over The Counter positions in nickel greater than 100 lots until further notice.
“The LME notes in particular that a large client of the market has now published details relating to the support of a banking consortium, which could suggest that the potential for further disorderly conditions may be mitigated,” the exchange said in a statement.
The eruption of Covid might be both good and bad news for Tsingshan and its banks – the outbreak could see nickel prices fall, thereby lessening the size of the Chinese companies’ potential losses, but Covid could also trigger concerns that it could see a falloff in Chinese business activity and cut business for Tsingshan and therefore cashflows.
…………
Meanwhile, the outbreak is having a clearly-defined impact on business with Chinese shares listed on the Hong Kong stock exchange tottering after Monday’s biggest daily slide for 14 years.
The Hang Seng China Enterprises index of mainland Chinese stocks lost more than 7% on Monday after authorities announced a six-day lockdown in the tech and manufacturing hub of Shenzhen. That was the index’s largest one-day fall since November 2008.
The slide helped the wider Hong Kong market to lose almost 5%. Markets in Mainland China in Shanghai and Shenzhen also fell sharply.
Losses were especially sharp on Monday for issuers with heavy exposure to sectors most vulnerable to economic disruption, including consumer and travel stocks.
The Hang Seng Tech index of large Chinese tech groups fell a record 11%, as did a Bloomberg index of listed casino operators in Macau (which have been hard by the pandemic in Hong Kong and now mainland China).
The weakness from this outbreak adds to the fears already held for mainland listed stock in Hong Kong which have been subjected to intense pressure from the Xi Jinping administration for much of the past year.
Those fears have already seen the main Hang Seng Index in Hong Kong driven down to six-year lows while other markets have risen (before the Russian invasion of Ukraine disrupted global business and markets).
Around 27 million people in two major areas, including the tech hub, Shenzhen are locked down, millions more under travel, education and movement restrictions in cities from Beijing to Shanghai. Infections have been reported from 27 “provincial localities” according to a government official.
China reported 2,125 cases on Monday – 1,337 symptomatic and 788 so-called ‘silent’ or asymptomatic carriers.
So far more than 10,000 cases of Covid Omicron have been detected from March 1 to Sunday, March 13 – the most since the original 2020 outbreak in Wuhan and more than all of 2021.
The rapid rise in case numbers is forcing China to change the zero policy of President Xi with rapid antigen test kits made freely available.
“Epidemiologists believe the explosion of cases outside China, as many countries dropped their COVID-19 policies, make it difficult to detect the more concealed yet highly contagious cases, and local officials’ loosening on COVID-19 controls are behind this sudden surge of China, the state-owned tabloid newspaper, Global Times said in a story on its website Tuesday morning.
“Yet they noted that when weathering outbreaks, the zero-COVID policy, currently the best strategy for China, is slowly undergoing changes, and will continue changing, citing allowing the use of COVID-19 antigen self-testing kits as a sign of a possible adjustment.”
But mass lockdowns, orders banning movement and mass testing are still the primary course of action.
As a result, dozens of factories in Shenzhen have already been ordered to close, including those of Apple supplier Foxconn, as the worsening outbreak tests President Xi Jinping’s commitment to the “zero-Covid” strategy adopted at the outset of the pandemic and which Covid Omicron is exposing as being too slow and too cumbersome with its faster incubation period and greater transmissibility (as we found in Australia).
At the same time, the fall rattled trading on Nasdaq on Wall Street on Monday which lost around 2% because fears of the knock-on impact on supply chains, especially for products from giants like Apple and other phone and product makers in Shenzhen.
Apple shares lost 2.6% on Monday as it saw one of its main iPhone assembly suppliers, Foxconn Technology Group, also known as Hon Hai Precision Industry, temporarily suspend operations at its key manufacturing hub in Shenzhen in response to the government-ordered lockdown.
That set off a chatter of worried analyst notes about the impact and whether Apple could switch production to other plans elsewhere in China (in Henan province, for example) or boost output at a plant in India.
Until early March, China had managed to contain outbreaks of the virus with the strategy it developed early in the pandemic: citywide lockdowns, mass testing and stringent contact tracing whenever an infection is detected. That had prevented nationwide waves of Covid for most of the past two years.
But that was with the Alpha and then the Delta variants – both of which have incubation periods of a week to 10 to 14 days. The dominant variant now is Omicron and its incubation period is two to three days, so the infections are spreading far more quickly.
China measures symptomatic cases and while it catches asymptomatic cases, they are not included in the infection numbers quoted in the official media.
“If the lockdown is extended, China’s economic growth could be significantly affected,” said Raymond Yeung, chief economist for Greater China at ANZ.
He added that just a one-week lockdown of the affected region could shave as much as 0.8 percentage points off annual economic growth, according to a report on Reuters.
The effects of the lockdown in Shenzhen, a hub for electronics manufacturing, would be felt far beyond China’s borders, Yeung said. “Any prolonged disruption to operations could cause yet another global supply chain crunch.”
