Deadly Wuhan virus could trigger commodities sell-off

The spread of the new coronavirus in China, which has killed nine people and advanced as far as the United States, could threaten demand for commodities from jet fuel to steel if China's economic activity slows, Bloomberg reports.

While the extent of the outbreak won’t be known for some time, it’s spooking investors who recall the sharp drops in raw materials that followed the SARS crisis of 2003.

Any dent to China’s growth could broadly hurt prices across agriculture, materials and energy, just as the economy is showing signs of stabilizing.

The timing of the virus’s escalation, ahead of peak travel and the halt to financial markets during the Lunar New Year, is pushing traders to offload risk and pressuring raw materials prices along with other assets.

And then there are specific concerns around individual commodities.

Fears over travel or government restrictions on transport, for instance, would reduce demand for items like jet fuel, or rubber for tires. Steel usage might falter if workers can’t make it back to construction sites after the Lunar holiday.

On a global basis, if the outbreak were to reach SARS-like proportions, it could sap 260,000 barrels a day of oil demand from the market this year, both indirectly through slower economic growth and directly as fear of airline travel reduces jet fuel use, Goldman Sachs analysts including Damien Courvalin said in a note. That could hit oil prices by US$3 a barrel, with a larger drop possible in the early days of the disease.

“The initial uncertainty on the potential scope of the epidemic could lead to a larger price sell-off than fundamentals suggest,” Courvalin wrote. “Such a move could in fact be exacerbated by both the current large net-long speculative positions in oil and the monitoring challenges created by the Chinese New Year.”