Iron ore, oil, copper and the prices of other industrial commodities fell on Friday as fears grew about the impact that China’s rising coronavirus cases and expanding restrictions will have on the already weak economy and demand.
Thanks to the growing weakness and more lockdowns, iron ore is now down 50% from the highs hit in March in the wake of the Russian invasion of Ukraine.
It is the first major outbreak of Covid across China since mid-year when harsh crackdowns hit large parts of China, especially Shanghai which was shut down – most notably the huge Tesla car plant.
Reuters reported that the growing Covid cases this time round has hit the country’s coal industry, especially in Mongolia, just as it is supposed to be building power station stocks ahead of the start of the winter heating season in mid-November.
China on Saturday reported a fifth straight day of more than 1,000 new COVID cases nationwide, a modest tally compared with the tens of thousands per day that sent Shanghai into a full-blown lockdown earlier in the year but enough to trigger more curbs and restrictions across the country.
The outbreaks emerged in the wake of the Communist Party Congress two weeks ago – a hint that case numbers had been suppressed during the week-long meeting.
The outbreaks saw US West Texas Intermediate crude futures fell $US2 a barrel in late trading on Friday, Comex copper eased, gold weakened and iron ore prices continued their multi-week fall with a dip to two years lows on Friday in Asia.
According to Japanese investment bank Nomura, more than 200 million people in nearly 30 cities – including the virus’s ground zero Wuhan – are now under a wave of crippling new measures.
It is believed the new infections are being caused by two highly contagious sub-variant of Omicron – BF.7 and BA.5.1.7. Nomura said the strict lockdowns are increasing and is now impacting 8.5% of China’s GDP.
The growing outbreak and control measures will have a growing impact on Australian companies, markets and investors – iron ore prices were rattled last week by thew news, falling to a series of two-year lows by Friday when the SGX Iron ore prices falling to $US80.15, down more than 14% for the week.
Chinese businesses in affected areas are being closed or put on short time, according to media reports, and there are growing fears that the steel sector will be hit.
Shanghai Disneyland is now operating at reduced capacity to comply with government Covid control measures, in yet another sign of tightening curbs across China as it seeks to contain the spread of coronavirus infections.
In Beijing, the Universal Resort theme park was shut on Wednesday after at least one visitor tested positive for the coronavirus.
Friday saw three-month copper on the London Metal Exchange fell 2% to around $US7,600 a tonne and the December copper in Shanghai Futures Exchange fell 1% to 62,830 yuan ($US8,672.07) a tonne.
“We have seen COVID-zero policies drowning out positivity from the onshore equities market on Wednesday, and it looks like without equities pricing risk-on, a systematic selling has emerged,” Marex’s analyst Zenon Ho said in a note.
China stocks fell, as COVID-19 flare-ups added to concerns of a dim economic outlook amid fears that growth will be sacrificed for ideology-driven policies under President Xi Jinping’s new leadership team.
LME aluminium fell 1.5% to $US2,252.50 a tonne, tin dropped 3.3% to $US18,080 a tonne, zinc tumbled 2.4% to $US2,871 a tonne and lead eased 0.4% to $US1,858 a tonne.
Reuters said China’s top three coal production regions have reported hundreds of COVID cases in recent weeks with the movement of coal restricted in major coal province, leaving some mines unable to ship coal out and forcing them to slow or halt production.
The curbs include special licences for trucks to enter mines, while drivers are not allowed to leave their cabs during entire shipment journeys, which often cover 1,000 kilometres.
“In Zhungeer county, which contributes 27% of Inner Mongolia’s coal production, authorities ordered everyone in the area to stay home since October 19 after a solitary COVID case was reported at a coal mine, Reuters reported. “Coal mines have to lower operations or even shut down if they cannot find trucks to transport their production out.”
A month-long maintenance shutdown at the Daqin railway, China’s biggest coal transport line connecting the coal mining hubs with Qinhuangdao port, has also been extended for a week after dozens of railway staff contracted COVID in mid-October, Reuters reported
Daqin typically transports about 1.3 million tonnes of coal day, but daily volumes have plunged to a fraction of that figure. Coal stocks at major ports have fallen 3% as China battles to maintain coal production at around 12.8 million tonnes a day
Spot prices for thermal coal are up 9% on the month, hitting a seven-month high of $US228 a tonne, according to Reuters.
China doesn’t use Australian thermal or coking coal, it has been heading to South Korea, Taiwan, Japan, India and other markets.
Australian thermal coal prices ex Newcastle ended Friday trading around $US385 tonne for December delivery – that was down slightly over the week and around 10% below the August peaks around $US444 a tonne.
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Meanwhile oil enjoyed a good week up to the final hour or so of Friday’s session when details of the sudden rise in Covid case numbers knocked prices lower.
West Texas Intermediate (WTI) crude oil closed lower on Friday as China introduced new lockdowns to halt the spread of Covid-19 in some major cities and the dollar rose.
WTI crude oil for December delivery ended down $US1.18 to $US87.90 a barrel. December Brent crude, the global benchmark, was down $US1.53 to $US95.43.
Brent edged up 0.6%, WTI jumped 3.8%
The drop comes on reports China put new lockdowns in place with new Covid-19 cases on the rise, according to Reuters which points out that President Xi’s zero-Covid policy has lowered China’s economic growth and reduced demand from the world’s No.1 oil importer.
As well, the dollar moved higher ahead of next week’s meeting of the Federal Reserve’s policy committee, which is expected to end with another hike to US interest rates.
The currency weakened sharply this week as many investors moved away from its safe haven on expectations the Fed may slow it rates hikes, but an unexpectedly strong third-quarter GDP report raised doubts the central bank will turn dovish.
As well, the US said core personal consumption expenditures, the Fed’s favoured inflation measure, rose an annual rate of 5.1% in September, up from 4.9% in August.
The number of oil rigs operating in the US dropped by two last week, according to energy-services firm Baker Hughes (BKR).
The count fell to 610 in the seven days to Friday. A year earlier, there were 444 oil rigs in operation across the US.
Oil and gas rigs in the US decreased by three to 768. Gas rigs fell by one to 156, while miscellaneous rigs remained unchanged at two.
In the same period of 2021, there were 100 gas rigs and zero miscellaneous rigs in operation. Overall, there were 544 rigs operating in the US a year ago.
