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Coronavirus and Commodity Demand

The coronavirus continues to cast a shadow over global markets. China was praised by the World Health Organization for their steps to limit the virus’ spread, and that helped soothe risk anxiety. One of the steps taken was to extend the Lunar New Year holiday break into the second week of February. While this should help to limit person-to-person contact, it will essentially keep the world’s largest economy offline for several weeks.

China’s January trade balance figures are scheduled to be released late next week. The first reports of the coronavirus occurred in late December, but there was a notable uptick in reported transmissions during January. As a result, the January data should start to reflect the impact of the virus. Keep in mind that the “official” (NBS) manufacturing and non-manufacturing PMI readings for January both came in above estimates and above the 50.0 level.

While China will continue to be a net importer of crude oil, they are likely to pull back from the record levels from last year as travel and shipping are disrupted. This could weigh heavily on RBOB and ULSD prices. Natural gas usage should also see a decline with factories offline, and that could affect LNG imports from the US.

Copper demand could be affected by the reduction in factory activity and construction projects. Chinese auto sales could be hit as well, which could hit demand for copper and PGMs, but a slowdown in auto sales has been underway for 18 months. Global palladium supplies are tight, which should help underpin prices for that metal.

China accounts for more than half of all global soybean imports, and that demand could shrink a bit during the first quarter. Chinese vegetable oil imports saw the sharpest increase of any commodity last year, and a drop off in demand could weigh on soybean oil prices. However, adequate food supply is a major priority for the government, during a crisis, and this could mitigate the effects of the slowdown. But Chinese clothing factories will be offline, and that has already raised concerns about cotton demand.

If there is clear progress in dealing with the coronavirus over the next few weeks, it could help China to get back online quickly. This could result in a sharp recovery move in across the commodities.

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