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Some of China's Top Suppliers Are Readying for a Virus Rebound

Thursday 20th February 2020

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Raw materials producers who rely on China for the bulk of their sales are showing confidence the risks posed by the coronavirus outbreak may soon ease -- and are poised to benefit from a forecast demand rebound.

Iron ore shipper Fortescue Metals Group Ltd. on Wednesday added to guarded optimism expressed by BHP Group as well as a developing positive outlook from banks, including UBS Group AG, over the prospects for a sharp recovery in China’s growth from next quarter, a scenario that’ll spur commodities imports.

The desire of China’s government to hit 2020 growth targets should boost iron ore because it’ll require investment in steel-intensive infrastructure projects such as railroads, Fortescue Chief Executive Officer Elizabeth Gaines told Bloomberg Television in an interview.

“Those big stimulus measures that are focused on infrastructure are actually a positive for steel, and therefore for iron ore,” Gaines said Wednesday. Fortescue won about 95% of first-half revenue from China.

BHP expects metals and bulk commodities could make up for volumes lost during the coronavirus disruption in the balance of 2020, so long as there’s a brisk recovery in China’s construction and manufacturing sectors next quarter. “We remain reasonably confident about the outlook,” CEO Mike Henry said in a Tuesday interview.

Growth in the top consuming nation could rebound sharply in the next two quarters as “delayed consumption and additional China stimulus” flows through to the economy, UBS analysts, including Glyn Lawcock, said in a Wednesday note. That return to work is expected to favor base metals suppliers including Glencore Plc, Freeport McMoRan Inc. and OZ Minerals Ltd., the bank said.

Any fiscal stimulus by China will also offer a boost later this year to base metals, which have strong upside as many of the materials are currently priced close to marginal cost levels, Perth-based South32 Ltd. said last week. The supplier of commodities, including manganese to nickel, wins about 22% of revenue from China.

In the short-term, key commodities such as iron ore are avoiding any dramatic impact from China’s virus response, with the strength of demand reflected in the country’s port-side iron ore stockpiles, which remain below a 2018 peak, Fortescue’s Gaines said in the interview.

“We are seeing continued demand, continued strength in the underlying iron ore price,” she told reporters earlier on a Wednesday conference call. “We are shipping and unloading as we speak in China, so it’s certainly business as usual for us.”

The virus is also having a positive near-term impact on other commodity prices, including manganese ore and alumina, amid a slowdown at China’s domestic mines, South32’s CEO Graham Kerr said last week.

Glencore sees a mixed picture for now, with some products being lifted as others falter, CEO Ivan Glasenberg told analysts on a Tuesday conference call. “In some commodities we have not seen an impact, orders are continuing, other commodities are slowing down,” he said.


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