COLUMN-Coronavirus supply disruptions are the next worry for metals: Russell

  • Reuters
  • Commodities News
COLUMN-Coronavirus supply disruptions are the next worry for metals: Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

* GRAPHIC: Spot platinum vs palladium:

By Clyde Russell

LAUNCESTON, Australia, March 24 (Reuters) - The spread of the coronavirus across the world has focused metals markets on the risks to demand, causing prices to plummet, but so far investors have largely ignored the mounting threats to supply.

A hint of what may be coming was South Africa's decision on Monday to impose a 21-day nationwide lockdown to try and contain the epidemic, a move that will affect the nation's mines. Africa is the world's largest producer of platinum, the second-largest of palladium and is also a major exporter of thermal coal, iron ore and gold .

The country dominates global platinum production, with its output of about 130 tonnes in 2019 nearly six times more than the next biggest producer, Russia.

Like most metals, platinum had been hit hard by the sell-off as the coronavirus spread from its source in China to Europe and North America, prompting several nations to shut down much of their economies to contain the disease.

Spot platinum XPT= fell 46% from its peak this year of $1,041.05 an ounce to its low of $558 on March 16, and it traded sideways since then to close at $642.50 on Monday.

After the lockdown announcement by South African President Cyril Ramaphosa, platinum opened higher on Tuesday, rising as much as 4.6% to $672 an ounce in early trade in Asia.

Palladium XPD= also gained early on Tuesday, rising as much as 7.9% to $1,854.50 an ounce in early Asian trade on Tuesday, although it is still down 37% from its peak this year on Feb. 27.

While the bounce in the price of platinum and palladium is far from confirmation that the worst is over for the metals, it does show that supply disruptions should be a factor in price discovery.

There are increasing reports from around the world of miners either idling output, or cutting it back as they try to manage the impact of the coronavirus.

Work at some copper mines in Chile and Peru has been scaled back, Brazil's Vale VALE3.SA has halted operations at a nickel mine in eastern Canada, while Rio Tinto (LON: RIO ) RIO.AX has curtailed some activities at its operations in Canada's Quebec province.

This is by no means an exhaustive list of mining curtailments, but it does show the trend is clear, as the coronavirus spreads it's likely more and more supply disruptions will be announced.

In looking at minerals that are particularly vulnerable to supply disruptions, iron ore and coal stand out, given the concentration of exports in just a handful of countries.

The seaborne iron ore market is dominated by just two countries, Australia and Brazil, with South Africa a very distant third.

About 60% of the total seaborne supplies come from Australia, and then mainly from the remote Pilbara region of Western Australia state.

While Rio Tinto, Australia's biggest iron ore producer, and fellow majors BHP Group BHP.AX and Fortescue Metals Group FMG.AX , have yet to curtail operations in Western Australia, there may come a time when the coronavirus forces their hands.

Most of the mines are dependent on fly-in, fly-out workers known colloquially as FIFOs, and Australian states are increasingly restricting movements of people.

For example, South Australia and Tasmania are among Australian states that now require all arrivals to self-isolate for 14 days, meaning FIFO workers on their time off would have to keep their distances from their families.

Not only would this be challenging for the mental health of the workers, it doesn't seem sustainable over a longer period.

Housing workers at the mines is also a challenge, given many don't have suitable accommodation and it may increase the risk of spreading the coronavirus if an infected worker spreads it to colleagues.

Australia is also the world's largest exporter of coking coal, and the second-largest shipper of thermal coal behind Indonesia.

Similar to iron ore, many of these mines are in remote locations, but even those closer to towns and cities are at risk of being forced to idle if Australia's federal and state governments move to stricter isolation measures.

Iron ore had held up relatively well during the coronavirus crisis, but fell sharply in the past few sessions as investors took the view that China's expected stimulus may not be as large as hoped, and the economic outlook for rest of the world was weakening rapidly.

Spot 62% iron ore for delivery to China MT-IO-QIN62=ARG , as assessed by commodity price reporting agency Argus, sunk to $79.60 a tonne on Monday, a four-month low and down 11.6% in just two trading sessions.

While the steel-making ingredient may remain under pressure, any major change in the supply dynamic from a coronavirus curtailment of supply may see a rapid reversal.

In short, miners, traders, end-users and investors in metals now have more to worry about than just a drop in demand, with supply outages an increasing reality. (Editing by Christian Schmollinger)

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