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Commodity prices slammed by China coronavirus outbreak

Investors fear 2003 'SARS shock' repeat amid plunging crude and copper futures

TOKYO -- Prices of crude oil and other commodities have fallen sharply since last week due to the deadly new coronavirus that originated in the central Chinese city of Wuhan.

Observers are bracing for a repeat of the 2003 "SARS shock," when an epidemic of severe acute respiratory syndrome in China rocked world markets.

The price of New York West Texas Intermediate crude oil futures briefly dropped to about $52 per barrel during after-hours trading on Monday, hitting their lowest level since October 2019. This represented a 20% decline from the year's high recorded in early January amid soaring tensions in the Middle East.

In international commodity markets, copper prices -- seen by many as a bellwether of China's economy -- are also falling. Benchmark three-month copper futures fell below $6,000 per ton on the London Metal Exchange. Prices of other nonferrous metals, including aluminum and nickel, have also declined.

Crude fell more than other commodities as investors expect the coronavirus to restrict the movement of people, driving down consumption of transportation fuel. A supply glut of crude is expected in the first half of this year, due to increased U.S. production coupled with the virus-fueled headwinds hindering global demand.

Plummeting prices have market watchers noting the similarity to 2003, when SARS ripped through China. At the time, the Nikkei World Commodity Price Index -- which comprises 14 commodities, including petroleum products and nonferrous metals -- fell to around 61 in April from around 73 in March, before the World Health Organization issued a global alert. The index's average was 100 in 1980.

The index's fall was also the result of the U.S. and U.K. attacks on Iraq after the country rejected calls for outside inspection of alleged weapons of mass destruction. The fall was huge and the term "SARS shock" was born to describe a general economic meltdown.

But commodity prices bounced back quickly and the Nikkei index clawed back all it loses by the end of the year.

Some private-sector forecasters predict the economic impact of the new coronavirus outbreak will not be as severe as that from the original SARS disaster, which was caused by a more deadly virus.

While markets are not panicking, they remain wary, with experts taking a close look at differences between 2003 and now. Takahide Kiuchi, executive economist at Nomura Research Institute, noted that at the peak of the SARS epidemic, retail sales growth in China fell by about 50% from year-earlier levels. "Considering that the Chinese economy is now much more dependent on consumer spending, the negative impact of the epidemic on the nation's economy will be significant," Kiuchi predicts.

And what happens in China will have repercussions around the world. For example, the number of Chinese tourists visiting Japan in 2019 was 21 times higher than in 2002. If the virus causes their spending in Japan to nose-dive, the Japanese economy will be hit far harder than in 2003, according to Kiuchi.

Moreover, China's economy is much weaker than in 2003, when it began growing at double-digit rates, fueled by resources from around the world. Chinese companies vacuumed up Australian iron ore and other minerals and demand for oil soared.

U.S. crude futures fell to around $25 per barrel at the onset of the SARS epidemic, but rebounded swiftly to $30 before breaking the $50 mark in 2004. It was the early stage of the commodities "super cycle," or the lengthy commodities boom of the early 21st century.

While the mood in commodities markets has brightened somewhat due to a shaky truce in the U.S.-China trade war, there is little evidence to indicate an upturn in the overall economy.

The steep decline in crude prices since last week seems to suggest that the Chinese economy is far more vulnerable to this kind of shock, as it has lost much of its momentum in recent years.

It is also disturbing that gold prices alone are rising amid a general collapse in other commodities.

Takayuki Homma, chief economist at Sumitomo Corporation Global Research, says investors are piling into gold as they are expecting that the slowing movement of people and goods will cause serious, far-reaching economic damage, extending yet again easy monetary policy.

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