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Research Report

19/05/2020 17:28

China commodities prospects brighten in post-COVID era

[ET Net News Agency, 19 May 2020] The second quarter is likely to still be tough for
China's commodities companies. S&P Global Ratings believes demand is gradually recovering
but has yet to normalize, even as aggressive measures have largely contained the COVID-19
outbreak in the country.
The credit rating agency continues to see price weakness. Oil prices have stabilized at
a much lower level than was seen during the first quarter, and chemical spreads generally
remain subdued. Coal and steel prices are also soft as inventories increased during the
lockdown. This according to a report published today by S&P Global Ratings titled "China
Commodities Watch: Brave New Post-COVID World."
"A more meaningful recovery will likely unfold in the second half. We base this view on
our assumption that COVID-19 will reach its peak in mid-2020 globally, allowing global
economic activity to slowly normalize," said S&P's credit analyst Danny Huang.
Cement is better positioned than other commodities because consumption is tied to the
region of production, and the resumption of construction and increased infrastructure
spending in China has raised the demand for cement in the country. These two factors will
bolster demand for long steel products. Flat products will benefit from a recovery in auto
sales in the second half, after a disastrous first quarter.
The performances of S&P's rated Chinese commodities companies generally weakened in the
first quarter on lower commodity prices amid slack demand as the COVID-19 outbreak went
global. The exceptions include Zijin Mining Group Co. Ltd. (02899) and Shandong Gold Group
Co. Ltd. (01787) which were supported by strong gold prices; China Oilfield Services Ltd.
(02883), which benefited from a one-off settlement payment and greater volumes before the
price of oil collapsed; and Beijing Haidian State-Owned Assets Investment Group Co. Ltd.,
which was likely due to its non-chemical segments.
Despite higher inventories, the cash conversion cycle in the first quarter was generally
comparable to that in the same period last year. This is attributable to either better
accounts receivable management or longer accounts payable days. However, it was weaker
than at end-2019, likely due to stronger working capital management toward the end of the
fiscal year.
"Since the outbreak of COVID-19, we have so far revised our outlooks on six companies,
or about one-fifth of publicly rated Chinese commodities firms, mostly in the oil and
chemical space. This is primarily due to the slide in the oil price since late March,
coupled with lost demand," said Huang.
Brent averaged US$51 per barrel in the first quarter due to higher prices in the first
two months. As COVID-19 started to spread globally from end-February, and with price war
breaking out between Saudi Arabia and Russia in early March, Brent fell below US$20 per
barrel in late April. With the pandemic transmission seeming to slow down lately--with
lockdowns in Europe and the U.S. gradually loosening--Brent is now above US$30 per barrel.
Brent should average US$30 per barrel for the rest of 2020 before recovering to US$50 per
barrel in 2021, S&P assumed.
China's refining margin was also on a declining trend and has triggered the US$40 per
barrel floor price. China's gasoline and diesel prices reference international crude oil
prices of the previous 10 working days, while refineries' crude costs reflect oil prices
of four to six weeks prior. (KL)

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