[ET Net News Agency, 6 February 2020] The coronavirus is spreading fast and having a
significant impact on the Chinese economy. S&P Global Ratings expects demand for
commodities to be affected over the next several months with factories and construction
sites in most provinces shut until at least 9 February 2020, and with travel significantly
curtailed. The recent weakness in commodity prices reflects such dynamics, according to a
report published today titled "China Commodities Watch: 2020 Outlook And Health Check."
Demand and prices will gradually rise as the outbreak eases. The credit rating agency's
base-case projection is that the health crisis will stabilize globally in April, with
virtually no new transmissions in May. To support the economy in the aftermath of the
outbreak, the government may increase investment in infrastructure. S&P expects steel and
cement to perform better than other commodities.
"We anticipate a one-off impact on operating cash flow and, therefore, leverage. Over
the next several months at least, as the outbreak plays out, companies may be challenged
to obtain refinancing and maintain sufficient liquidity. We believe larger companies are
in a better position to manage liquidity," said S&P's credit analyst Danny Huang.
S&P has a stable outlook for most of the Chinese commodities companies it rates. Robust
commodity prices in 2017 and 2018 supported their credit metrics. Despite price softening
in 2019, their financial performance remained generally healthy. Steel companies are the
exception. These saw significant declines in profit from a strong 2018 due to the spike in
iron ore prices starting in early 2019.
Chinese oil companies' credit metrics will likely remain robust given our assumption of
a largely stable oil price. S&P Global Ratings assumes US$60 per barrel for Brent in 2020
and US$55 per barrel in 2021 and onwards, versus a 2019 average of US$64 per barrel.
However, recent oil price weakness will pressure near-term profit.
The agency assumed coal prices in China will fall by 10% in 2020 from 2019, primarily
driven by weak demand and rising supply. Moreover, government policy works against coal
price increases.
China's steel demand growth should slightly outpace that of steel supply in 2020, though
both will post low single-digit growth rates. China's crude steel production rose 8.3% to
a record of 996 million tons in 2019. This was mainly driven by the new capacity of 42
million tons per annum.
Despite the spread of the coronavirus, most steel mills kept their blast furnaces
running during the Lunar New Year. If the coronavirus crisis persists, we expect transport
bottlenecks, causing steel mills to possibly cut output in March.
Faltering demand growth will remain the key risk to chemical product spreads in 2020.
Despite a phase one trade deal struck between the U.S. and China in January 2020, most
chemicals traded between the U.S. and China remain affected by tariffs. As such, S&P
expects China's chemical exports to remain lackluster this year, which is an extension of
the 2019 trend.
"A rebound in domestic demand growth for chemical products looks unlikely in 2020.
Notwithstanding a slight recovery in China's manufacturing purchasing managers' index
toward the end of 2019, we expect that a slowing construction market, moderating
industrial growth, and a sluggish automotive sector will continue to drag on demand for
chemicals this year," said S&P's credit analyst Lawrence Lu.
Cement prices will likely stay elevated over the next 12-24 months after the coronavirus
abates. Investment in real estate and infrastructure will likely remain resilient,
supporting cement demand.
On the supply side, production rationalization among cement producers will continue.
Cement production will likely face more restrictions given state environmental measures.
Gold prices hit a six-year high of more than US$1,550 per ounce in early September 2019, a
healthy average increase of 18% for the year amid a tepid macroeconomic outlook,
low-interest rates, geopolitical instability, and global trade tensions. (KL)