By Andy Home
LONDON- The scale of the coronavirus hit to China’s giant manufacturing sector was laid bare by the slump in the country’s purchasing managers indexes (PMI) for February.
The official PMI imploded from 50.0 to 35.7, while the Caixin index, which captures activity among smaller companies, tumbled from 51.1 to a record low of 40.3. The collapse in manufacturing activity last month was worse than that seen during the global financial crisis.
Base metal prices have fallen but by nowhere near as much as they did in late 2008, suggesting traders are still expecting a fast rebound in activity and metals demand once the virus is contained in China.
However, there are ominous signs that a physical demand shock is playing out in China which may generate a second-wave hit to prices.
Shanghai Futures Exchange (ShFE) holdings of copper, aluminum and zinc are trending sharply higher.
More may be accumulating in the off-exchange shadows.
A call by China’s Nonferrous Metals Industry Association (CNIA) for a government stockpiling plan is a clear distress signal from China’s producers.
It’s also an unwelcome echo of crisis past. The last time the Chinese government bought up metal stocks to support its producers was during the worst of the 2008-2009 manufacturing slump that followed financial meltdown.
ShFE stocks of copper have more than doubled from 124,000 tons since the end of December to a current 310,760 tons.
Zinc inventory has mushroomed from 28,000 to 160,011 tons and aluminum stocks are up 254,000 tons since the end of last year, reversing a downtrend that had been running since the middle of 2018.
Chinese exchange inventories always rise over the Lunar New Year holiday period but this year’s build has been faster and bigger than “normal”.
The seasonal disconnect between China’s producers, who largely maintain output over the new year holidays, and manufacturers, who tend to shut up operations completely, is this year being accentuated by the delayed restart of many downstream operators due to quarantining.
This disconnect varies from metal to metal.
China is the world’s largest producer of aluminum and aluminum smelters run most efficiently at continuous high utilization rates. Moreover, national run-rates rose in January as new and restarted capacity hit the domestic market just at the wrong time.
China’s aluminum supply chain is complex and the coronavirus is causing multiple dislocations but the steep rise in visible exchange inventory suggests a sector ill-equipped to prevent a fast build in surplus metal.
China’s zinc smelters have also been in the process of lifting collective production after a prolonged period of raw material shortfall. They too are now pumping metal into a demand hole.
Not all Chinese metal markets are being affected in the same way though.
Shanghai lead stocks, for example, have fallen by 6,551 tons to 38,011 tons over January and February.
The divergence with other metals suggests Chinese lead supply is being impacted more by the virus than demand, possibly reflecting disruption to the scrap battery segment of the supply chain.
Battery collection and transportation have ground to a halt in parts of the country, cutting off feed for lead recyclers. – Reuters
