Contributed Commentaries
Macroeconomics: implications of the coronavirus outbreak for commodity markets
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
As of 30 January, the death toll from the coronavirus outbreak has risen to 170, with almost 8,000 confirmed cases and infections having spread to at least 15 countries. Following the first notifications of the disease on the 20 January, the value of major mining equities has fallen by around 10% as investors have become increasingly concerned about its implications on the Chinese, and world, economy. The copper price has also fallen by 10% whilst the gold price has hit a seven-year high.
Roskill View
At a personal level, the effects of the Coronavirus are, of course, devastating. The outbreak of disease is also still in its relatively early stages and the full extent of the medical emergency is yet to be fully understood. What is known is that the death rate from infections is significantly less than previous virus outbreaks, such as SARS in 2002–2003 and MERS in 2012, but that the scale of the outbreak is already much larger. During the MERS outbreak, the number of people confirmed to have been infected was limited to 2,494 people, but 858 deaths were reported.
These figures need to be put in the context of 650,000 deaths globally a year as a result of flu. However, 90% of the economic impact of outbreaks of disease is indirect, mainly from disruption associated with attempts to contain its spread and the overall effect on confidence. During the SARS outbreak, the quarter-on-quarter GDP growth rate in China dropped by 2%. In 2003, annual GDP growth in China was 9.1% compared to 10% in the previous year, suggesting an overall impact on GDP of 0.5-1.0%, although some this loss is likely to have been recovered in subsequent years.
Any numerical estimates of the impact on the Chinese economy of today’s viral outbreak are purely speculative at this stage, but the impact on the economy could be worse this time than in 2002–2003 as the current infection appears to be more easily communicated and as China is a much more connected economy, both domestically and globally. In terms of its impact on commodities, the effect will be more leveraged than before as China now consumes around half of all metals produced globally compared to around 10–20% in 2002. On a more positive note, previous experience is that the economic effects of disease outbreaks tend to be V-shaped; once health issues are resolved and regulations eased, markets usually recover relatively quickly.
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