Commodities to take bigger hit from coronavirus than from Sars: DBS

A steel worker of ThyssenKrupp stands amid sparks of raw iron coming from a blast furnace in Germany on Jan 30, 2020.
A steel worker of ThyssenKrupp stands amid sparks of raw iron coming from a blast furnace in Germany on Jan 30, 2020.PHOTO: REUTERS

SINGAPORE (THE BUSINESS TIMES) - DBS Group Research said the novel coronavirus outbreak will have a larger negative impact on commodity demand and prices, compared to the severe acute respiratory syndrome (Sars) epidemic.

This is because China's contribution to global metal consumption has increased to about 50 per cent, from below 20 per cent in 2003.

"Referencing China's gross domestic growth (GDP) growth drop of 2.9 percentage points in Q2 2003 after the Sars outbreak, the virus could spur a deeper economic slowdown in China in 2020," DBS analyst Lee Eun Young wrote in a report on Monday (Feb 3).

According to DBS, it took about two months for metal prices to recover to pre-Sars levels.

The brokerage also expects the adverse impact of the virus to be greater than Sars, as China posted high economic growth in 2003, versus decelerating growth this year.

Moreover, Wuhan is a mega Chinese city and the centre for various industries, including automobiles.

This means that any supply chain and logistics breakdown and extended Chinese New Year holidays would lead to more contraction in economic activities and a reduction in commodity demand, DBS said.

Accordingly, it has revised its metal price forecasts down by about 2 to 3 per cent, especially for copper and steel, whose "fortunes are tied to the macro picture", DBS explained.

Meanwhile, the brokerage believes that gold and silver prices will continue to be buoyed by favourable investment sentiment, riding on their status as safe-haven assets.

 
 
 

Expectations of a persistent low interest rate environment should also bolster their prices, and DBS has revised its price forecasts for gold and silver by 2 per cent each.

Despite the bank's conservative view on the commodity market, DBS expects there to be bargain hunting opportunities at the peak of the outbreak. It envisions that this peak could come within the next one to two months, if there is no significant community spread in other regions except Wuhan.

The latest coronavirus outbreak has sickened over 20,000 people worldwide and killed over 420 at last count. This means its death rate remains at about 2 per cent compared to around 10 per cent during the 2003 Sars epidemic, though the Wuhan virus has sickened more people than Sars. Studies on how quickly it spreads remain inconclusive, with a commonly used measure - known as the basic reproduction number - being difficult to calculate.

The virus was first reported as a string of pneumonia-like cases in Wuhan in December, before the World Health Organization identified it in early January as a new strain of coronavirus. It has since spread to markets including Singapore, Malaysia, Taiwan, France, South Korea and Canada.