Miners to bear the brunt of China coronavirus woes

The coronavirus outbreak could have a ‘material’ impact on miners in the near and medium term, analysts say.

Australia sends 30 per cent of its exports to China, including iron ore Picture: Bloomberg

The coronavirus outbreak could have a “material” impact on miners in the near and medium term, analysts say, as China’s economy is threatened by the spreading medical crisis.

Iron ore and base metals miners took the brunt of the hit in Tuesday’s trading, falling sharply on the back of tumbling overseas markets and commodity prices.

Copper traded on the London Metals Exchange is down almost 9 per cent since the first corona­virus case outside of China, in Thailand, was reported on January 13 — falling from just over $US6300 a tonne to $US5743 a tonne on Tuesday.

And despite restricted trading at Chinese ports due to the New Year celebrations, iron ore markets are also down 10 per cent over the past five days, according to RBC Capital Markets analyst Tyler Broda.

Nickel prices are down more than 12 per cent over the same ­period, to $US12,595, with zinc off 7.6 per cent at $US2240 a tonne.

All are regarded as proxies for industrial growth, particularly in China, and seen as potentially struggling if the coronavirus is not quickly contained and has a broader impact on the Chinese economy.

With global markets in chaos as a result of the spreading outbreak, Citi analysts noted any company with an “outsized China exposure” would be negatively regarded on global markets.

Fortescue Metals shares, once seen as the clearest proxy on the Australian market for the health of the Chinese economy, shed 91c, or 7.3 per cent, to $11.57 in response to market falls.

Shares in manganese miner ­Jupiter Mines, also closely tied to the health of China’s steel sector, fell 2c, or 6.9 per cent, to 28.5c, with copper miner Sandfire Resources down 34c, or 5.7 per cent, at $5.60. OZ Minerals shed 55c, or 5.3 per cent, to $8.93.

Diversified majors BHP and Rio Tinto also closed down, respectively off $1.35 to $39.10 and $3.19 to $99.99. Tuesday was the first day Rio has closed below $100 a share since December 12.

“Recently improving Chinese macro and industrial-related data has, we think, been an encouraging sign of stabilising growth that we view as potentially supportive of improving China-related growth for our companies with significant geographical exposure to the nation,” Citi analysts led by Andrew Kaplowitz said in a client note on Tuesday.

“The ongoing outbreak of coronavirus that began in Wuhan, China, now represents a growing risk factor to our positive outlook on China-related growth. From a stock perspective, outsized China exposure could be a relative negative in the near term as the situation unfolds.”

RBC’s Mr Broda said any economic blip caused by the impact of the virus could have a broader impact on the heavily indebted Chinese corporate sector and flow through to Australian producers.

“A shock to economic activity, which may already be occurring with authorities now delaying the end to the Chinese New Year holiday, could cause a financial stress event that might be particularly troublesome for the levered property sector, a key driver of steel ­demand,” he said.

Macquarie analysts noted the broader comparisons between the coronavirus and the 2003 SARS outbreak indicated it may take some time for metals markets to recover.

“At the time base metals prices saw declines of 5-15 per cent, taking three to five months to recover to pre-SARS levels,” Macquarie analysts said.

“By now China’s share of demand is even larger, at about 50 per cent for most refined base metals versus about 20 per cent back in 2003, making the single-country exposure even greater.”

Mr Broda said the medium-term impact of the virus, even if it was quickly contained, could depend on China’s response to the immediate economic hit.

He said that, “following the immediate phase of slowed demand” Chinese policymakers could “revert to form” with “increased support for infrastructure, property and liquidity boosts, which have been used numerous times over the past decade and have been an effective policy tool to normalise short-term growth”.

“We would expect this would occur again. This will likely further erode the longer-term outlook but could allow for the sector to have a sharp recovery,” he said.