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What are the impacts of the coronavirus (covid-19) on mining?

4 de Março de 2020

Um chinês com uma máscara cirúrgica em frente a um gráfico

The coronavirus (COVID-19) has already caused the deaths of more than 3,000 people in China (1) and almost 4,000 people in other countries. Three hundred and one cases of the disease have been confirmed in Brazil, with a further 2,000 suspected cases(2).

In addition to the enormous and regrettable human losses, the increase in cases outside of China has caused a major downturn in the main capital markets around the world. The fear of a pandemic and the consequent downturn in global economic activity has caused panic on the world's main stock exchanges and throughout the production chain in general.

In an increasingly globalised world with interconnected production processes, a crisis of this size in one of the world's largest production parks affects practically all industrialised countries.

In the mining sector the situation is no different. With China as the main consumer market for most mineral commodities, mining companies fear that the fall in Chinese economic activity will lead to a fall in demand for mineral inputs.

In part, this is already happening: in parallel with the release of data on the contraction of Chinese industrial activity in February, reaching levels close to those seen in 2004(3), Brazilian iron ore exports also fell by 23.6% in February compared to the same period in 2019(4).

In addition to the impact on the consumer market for its products, the Brazilian mineral industry is also suffering from imports of equipment and parts. With the advance of the disease in China, several factories have stopped operations, drastically reducing the manufacture and availability of machinery for a wide range of sectors.

Despite the negative outlook for the industry worldwide, analysts believe that the real impacts on the world economy may be mitigated with the end of winter in the northern hemisphere and progress in research into vaccines and medicines against the disease.

In any case, the Brazilian mineral industry, which is still recovering from the international commodities crises and the political and economic crisis experienced in the second half of this decade, will face major challenges this year with the reduction in demand and prices for its main mineral goods.

Impact on the price of iron ore

The sharp drop in Chinese demand for iron ore had a direct impact on the January and February 2020 contracts for the sale of Brazilian ore. The Platts index, the main benchmark index for buying and selling iron ore, fell from 95.65 USD/t at the start of the year to 82.55 USD/t at the end of January after the spread of the disease in China. Today the index has recovered slightly, reaching 87.85 USD/t (5).

 

The fall in prices that occurred in the period, however, is much smaller than that seen during the commodities crises in 2016 and 2017, when iron ore was trading at 37.00 USD/t.

As a direct impact of this fall in prices and the forecasts of the advance of COVID-19 around the world, Vale's shares have already fallen by 11.4 per cent, while Gerdau has seen losses of 9.2 per cent (6). Despite this, analysts believe that prices could recover in 2020 with the consumption of the stockpile of ore accumulated in Chinese ports due to the slowdown in production activities and the Chinese government's actions to stimulate the economy.

 

Similarly, nickel fell sharply from the second half of January, when alarming data on the increase in confirmed Coronavirus cases was released. The commodity was trading at 14,290.00 USD/t in January and is currently quoted at 12,659.10 USD/t (8).

Impact on other mineral commodities

As with iron ore, several other mineral commodities have seen sharp price drops following the release of data on the spread of the Coronavirus in China. According to an official statement from BHP Biliton, the world's largest mining company, "If the viral outbreak is not proven to be contained in the first quarter, we expect to revise our expectations for economic and commodity demand growth downwards."

This trend is reflected in the price of the main mineral commodities, such as copper, which peaked for the year at 6,300.50 USD/t and is currently trading at 5,669.76 USD/t(7).

Evolução do preço do níquel de janeiro a março de 2020
Nickel price trends

In contrast to most metals, gold has seen a notable increase in its price, mainly due to the chaos created in the financial markets by the spread of COVID-19. The yellow metal is considered a safe haven for investors in times of crisis, so it went from around 1460.00 USD/oz at the end of last year to 1660.00 USD/oz in January this year(9).

Tendência do preço do ouro de setembro de 2019 a fevereiro de 2020
Evolução do preço do ouro

What to expect in 2020

In a highly speculative and volatile environment, forecasts for the year have fallen apart with each new piece of news about the proliferation of the virus. Despite this, analysts believe that the end of winter in the northern hemisphere and global research efforts into COVID-19 could bring a more peaceful environment in the second half of 2020.

Credit Suisse, for example, pointed out that iron ore has had the worst time with the Chinese virus. "Iron ore was priced for robust demand and reduced supply in the first quarter, but the virus has led to the opposite, with demand absent and port stocks likely to rise" (10).

It is uncertain how quickly the world economy will recover, even if the proliferation of the virus cools down. However, the recent drop in the daily increase in proven cases of the disease may indicate that industrial activity in China will recover later in 2020, and consequently bring mineral commodity prices back to the levels of late 2019.

In addition, the Chinese government has taken measures to reignite its productive activity, such as reducing corporate taxes and cutting government spending, which should take effect in the second quarter.

Other world economic powers have announced measures to mitigate the effects of the Coronavirus on the world economy, such as the United States, which, through the FED, announced a 0.5 percentage point cut in its basic interest rate. The same happened in Australia and should happen in Brazil at the next Copom meeting(11).

The European Union is also preparing measures to stimulate the economy, such as tax exemptions and tax debt instalments. These actions will give companies more leverage to honour their commitments and provide cheaper credit, favouring investment in a wide range of productive sectors.

While on the one hand the government's actions are aimed at stimulating the world economy so that the effects of the Coronavirus dissipate quickly, on the other hand they show the countries' great concern about the impact of the viral proliferation on their economies. The coming weeks will show more clearly the real impact of these actions on the world economy, and therefore on the mining sector.

References

  1. According to monitoring by Johns Hopkins University
  2. According to data from the Ministry of Health, 17 March 2020;
  3. According to the National Bureau of Statistics (BNS), as reported by France Press. The purchasing managers' index (PMI) for February stood at 35.7 points, down from 50.0 in January, according to the BNS. A figure above 50 indicates an expansion in activity and below, a contraction;
  4. According to data from the Foreign Trade Secretariat (Secex), released on 02/03/2020;
  5. Iron Ore Index - IODEX - PLATTS - 03/03/2020;
  6. Comparing 20 January to 03 March 2020;
  7. Source:https://markets.businessinsider.com/;
  8. Source:https://markets.businessinsider.com/;
  9. Source:https://infomine.com
  10. Via Infomoney
  11. COPOM meeting on 17 and 18 March 2020
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