Market insight: The cost of Sars to commodities
By Kevin Morrison in London
Published: April 24 2003 16:39
The rising tide of deaths and infections from the Sars is making for increasingly nervous times for the commodity markets as the pneumonia-like virus slows economic activity in the Asian region, threatening demand for metals and oils.
Gold, however, remains one of the few metals relatively immune to the threats from Sars.
The virus has already prompted Singapore to cut its economic forecasts for the year, while economists are also trimming their forecasts for China. JP Morgan Chase said this week that China's economy could contract by 2 per cent in the second quarter because of the spread of Sars. China's economy grew by 9 per cent in the first quarter.
Although analysts say it is too early to estimate whether demand will be affected, metal prices are very sensitive to the threat of Sars. China is the biggest consumer of copper, nickel and iron ore, and the second largest behind the US for aluminium.
Metal traders in London said copper prices on the Shanghai futures exchange dropped this week as Chinese traders worried about the effect on metal consumption if Sars continues to spread in Asia.
"There is no buying in Shanghai this week. It has gone very quiet since last week," said one trader.
The change in sentiment follows the about-turn by the Chinese Government last weekend to be more open about Sars, which led to a 10-fold increase in the number of official cases reported.
China also accounts for 24 per cent of the world's platinum jewellery demand - almost 1.5m ounces, up from almost nothing in the mid-1990s. "Platinum is much more associated with the new wealth and the new industrial economy in China, whereas gold is associated with rural, old economy China," said John Reade, precious metals analyst at UBS Warburg.
The growing demand for platinum jewellery in China contributed to the rise in the metal's price to a 23-year high in February.
Jewellery consumption accounted for about 43 per cent of total platinum use of 6.37m ounces last year. The rest is used by the chemical, electrical, motor, glass and petroleum industries.
Gold, on the other hand, is seen as largely unaffected by the deadly virus, although there were reports this week that a woman in Pune, India is infected by Sars.
"If we see Sars turn up in places like India then we could see some real affect on gold," Mr Reade added.
India accounted for about 12 per cent of global gold demand last year or more than 575 tonnes, most of which is imported. Whereas, China produces about 200 tonnes of gold, equal to the amount it consumes, or about six per cent of global gold demand.
Gold is currently benefiting from the weak US dollar, which is trading around five-week lows against the euro and multi-year lows against the Australian and Canadian dollar and the Swiss franc. At the same time stock markets in the US and Europe have had double digit rallies from the lows touched during the lead-up to war in Iraq.
"The war premium has gone out of the gold price, and investors have looked back at economic fundamentals. They don't like what they see and therefore don't want to know about the dollar," said Mr Reade.
Oil traders are also nervous. Asia's regional benchmark jet-kerosene prices have dropped more than 32 per cent since early March ahead of the war in Iraq, greater than the 28 per cent slide in US benchmark crude prices over the same period.
Oil analysts attribute the steeper fall in Asian jet fuel prices to the drop in fuel demand from Asian airlines, which have severely cut back services in response to the plunge in bookings due to Sars fears.
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