Update: Chinese GDP estimates decline on coronavirus

Uncertainty over the coronavirus outbreak — which has sickened 37,251 people in 25 countries and left 813 people dead (all but two of them in mainland China) as of Feb. 9 — has analysts trying to calculate the economic impact of the disease on global economic growth, commodity markets and worldwide trade and supply chains.

In particular, the health crisis is raising fears of a slowing Chinese economy, which consumes more than 50% of the world’s base metals, is a major importer of iron ore, and produces about 53% of the world’s steel.

Last year, the Chinese economy grew by 6.1% — the slowest pace in nearly 30 years — and analysts have already started cutting their GDP forecasts for 2020.

Moody’s Investor Service estimates Chinese GDP will grow 5.8% this year, while Pierre Vaillancourt, a mining analyst at Haywood Securities, says the figure could fall to as low as 5.5%.

The economics team at BMO Capital Markets has cut its GDP growth estimate for China to 4.5% in the first quarter of 2020 and to 5.5% for the full year.

“Reduced manufacturing activity and lower construction and infrastructure investment will hurt demand across the base metals and iron ore complex and potentially change the dynamics where deficit positions exist in 2019 (copper, zinc, nickel) to either bring metals into a surplus position, or create an even greater surplus than forecast for 2020 — to the further detriment of prices,” Moody’s stated in a Feb. 4 research note.

“While all producers will be affected, smaller companies at the low end of the rating scale and single-commodity producers will see the effects sooner than larger more diversified miners. Companies with a material percentage of their revenue derived from sales into China will be hit by both price and unit sales declines.”

In the last two weeks, prices of copper, iron ore and nickel have fallen by about 10%.

West Texas Intermediate crude ended the day at US$49.61, its lowest level in more than 12 months.

Comparisons to the economic impact of another coronavirus outbreak in 2002/2003 — the Severe Acute Respiratory Syndrome (SARS) — are not meaningful, many analysts say, as China’s economy today makes up a much bigger part of the global economy than it did 18 years ago.

For commodities, BMO says, “it’s a whole different world now.”

“In 2003, China was about 20% of base metals demand and about 25% of steel,” BMO reported. “Now, overall markets are 50-100% larger than at that point, with China about 50% of demand. The impact on commodity markets is naturally amplified this time around.”

Hubei province, where the city of Wuhan is located (and the epicenter of the coronavirus outbreak), also manufactures about 8% of the country’s autos and is China’s largest galvanized steel producer, BMO notes. “Thus, disruption to activity is net negative for metals markets.”

Wuhan is also one of China’s key oil and gas hubs.

“Hubei province had expected to record a regional economic growth rate of up to 7.8% in 2020 according to the local authorities, 200 basis points higher than our forecast for China’s total economy,” Moody’s stated. “As China’s ninth-most populous and seventh-highest province by GDP, a slowdown in economic activity will pose significant repercussions for the country as a whole.”

“When SARS hit, China’s economy was on an upswing, with swelling numbers of outbound travellers and fast-growing trade, but it was only the sixth biggest economy, whereas today it is No. 2 in GDP and No. 1 in world trade,” James T. Areddy, a reporter at The Wall Street Journal, noted wrote in an article on Feb. 3.

“Forecasting the costs of the crisis is impossible,” he notes. “Last year, the WHO said in a report that it had tracked 1,483 epidemic events in 172 countries between 2011 and 2018. The most expensive in recent history include US$40 billion in lost productivity due to SARS in 2003 and up to US$50 billion during a 2009 H1N1 swine flu epidemic, both of which involved China. The WHO said an outbreak of Ebola in West Africa from 2014 to 2016 cost US$53 billion in economic and social impacts.”

When the benchmark Shanghai Composite Index re-opened on Feb. 3 after the Chinese New Year break, it closed down 7.7% — erasing almost US$400 billion in value — while the Shenzhen Composite Index fell 8.4%.

China’s central bank has injected liquidity into its financial system.  On Feb. 3 it injected US$171 billion into the financial system, and a further US$71 billion on Feb. 4.

Of the 28,276 confirmed cases of the new coronavirus, 28,060 are in China.

SARS infected 8,098 people around the world and killed 774 of them.

SARS killed about 10% of those infected. By contrast, 2% of those infected in China with the new coronavirus have died so far.

The coronavirus is known as nCoV-2019 — short-hand for “novel coronavirus of 2019”.

It is believed to have jumped from an animal to a human at a seafood and live-animal market in Wuhan.

SARS originally was a virus found in bats.