Auto shutdowns confirm metals demand shock

US-based Ford and General Motors (GM) are shutting down all of their North American operations through to 30 March in response to the growing coronavirus pandemic. In Europe, Seat, Nissan, Volkswagen, Ford, Renault and others have reduced output or plan to scale back, lowering demand from one of the biggest metals consuming sectors.

Trade in hot-rolled coil (HRC) in Europe, the staple of car production, is grinding to a halt as spot demand from carmakers drops and the near-term outlook remains deeply uncertain given the trajectory of the virus outbreak in Europe and the US. Markets for non-ferrous metals copper, aluminium and multiple other speciality metals and alloys are also chilling as the automotive slowdown bites.

As in China, the coronavirus impact is on both demand and supply. On the supply side, steel and non-ferrous metals production in Europe is falling, either as a result of virus containment measures or as a response to lower demand. The ability of supply and demand to find a balance will be seriously challenged by the breakdown of liquidity across traded spot markets.

European steel mills are curbing production but whether or not this will be sufficient to prevent an extraordinary inventory build-up across the supply chain, as seen in China, remains to be seen. As China emerges from its coronavirus crisis, its steel inventory build-up is unwinding. Inventories held by mills and traders fell by 1.9mn t in the week to 19 March, according to industry data released today. This was the first weekly decline since December and shows trader-held warehouse stocks peaked at over 26mn t during the week of 12 March. This compared with the usual 20mn t seasonal peak in late February or early March.

But the demand shock in Europe and the US could blow back eastwards, hitting export demand for Chinese steel and metal components and potentially depressing domestic China prices, despite that market's local demand recovery as Chinese industry returns to normal operating rates. Iron ore and steel futures markets in China pulled back sharply this week, reflecting that possibility.

Emergency measures

Industrial metals markets outside China have been clinging to the view that state intervention in the form of emergency rate cuts and other measures including quantitative easing will cushion economies from the drastic virus containment measures now rolling out in all regions.

Confidence in the success of these policies has been low so far, although equity markets bounced today on the back of significant intervention by the European Central Bank. Copper and aluminium prices on the London Metal Exchange have trended sharply lower in the past couple of weeks, partly in tandem with diving stock markets but also on the expectations that industrial metals demand will fall through the second quarter.

US investment bank Goldman Sachs this week revised down its copper, aluminium and nickel near-term price forecasts, citing widening supply surpluses that could take prices down to the cost of production. But it sees metals prices bouncing back in the second half of the year. Goldman Sachs and others have also raised doubts about China's willingness to go the extra mile with stimulus measures, having seen the longer-term impact of such measures in the wake of the 2008 financial crisis.

By Stuart Penson