There is no escaping that the coronavirus is having a profound impact on business in Australia, given the country’s reliance on trading its natural resources to China and other parts of the world.
But increasingly, analysts are turning their attention to how widespread and lasting the impact of the COVID-19 outbreak will be and what a recovery could look like.
What has been noticed by analysts is that activity is starting up again, albeit slowly.
There are also some promising early indicators of policy response and optimism around the long-term forecasts, which suggest electric vehicle (EV) production growth – and therefore demand for battery metals and minerals – may remain unaffected.
BloombergNEF, the research arm of the eponymous financial markets data provider, used a webinar this week to discuss early signs of the Chinese economic reaction to the virus. There was a focus on two likely models of economic recovery in China – the optimistic V-model that posits a sharp decline and an equally sharp return to “business as usual”, and a more long-winded U-model that will see a much slower ramping-up of economic activity.
BloombergNEF head of metals and mining Sophie Lu told the Bloomberg Metals and Mining Webinar that pre-COVID-19 forecasts, assuming the worst-case scenario of a protracted trade war with the US, had factored in China GDP growth of 4.7 per cent annually on average for a 10-year period.
Post COVID-19, her team forecast that GDP growth would shrink to 1.2 per cent this quarter – a prediction she explained was very much in-line with other analysts.
“This is very low,” she told the webinar.
“In the greater scheme of the range of the various forecasts predicted by various analysts from different banks, it actually falls in the middle.”
Returning to work in China
Ms Lu pointed to activity indicators that may offer an insight into the way the economy was behaving on a macro scale and serve as a good judge as to the way it might recover.
Historically, public transport use comes to a standstill around Chinese New Year, returning to near 100 per cent in the following two weeks.
Across Beijing, Shanghai and Guangzhou, almost 40 days since the end of the holiday season, use of public transport had returned to only about 20 per cent when compared to the same period in 2019.
There had, however, been a sharp uptick in congestion on highways, which indicated that people were returning to work where they could but avoiding public transport and other forms of mass transport and car sharing.
In fact, Ms Lu said, in most major cities only 40 per cent to 50 per cent of seasonal workers had returned to work. In 2019 it took just 25 days post-Chinese New Year for 100 per cent of seasonal workers to migrate back to the cities.
Ms Lu said this slower resumption would put massive constraints on the ability of industrial and construction work to return to full activity levels.
The air quality index also reflected this, with low pollution levels indicating far fewer diesel trucks on the road across major cities. The exception was Hebei province, which had recorded a spike over the past week, possibly indicating a return to normal, or close to normal, production levels.
Across the board, it has been forecast that production levels will remain 20 per cent short of the pre-virus levels for 2020.
Near-term battery metals demand
Ms Lu said the best-case scenario was for EV sales growth this year to be flat.
The optimistic V-model indicated COVID-19’s impact would be contained in the first quarter of this year, with a sharp uptick from this quarter.
However, the more gradual U-model seemed more likely at this stage.
“We see the pessimistic scenario to be more likely,” she said.
“That is, we will see about 20 per cent less recovery. Basically, the growth rate will be about 20 per cent lower than what we were expecting before the coronavirus.
“There are going to have to be pretty significant policy decisions this year in order to stimulate the industry from a severe decline.
“The Chinese government is considering delaying the full cancellation of the EV subsidies, they were originally supposed to get rid of them at the end of this year and move to a new policy format (but) there are early indicators that the government may be reconsidering that.”
Ms Lu said it was interesting to note, however, that demand for battery metals and materials – lithium, nickel, copper and cobalt – appeared to have bounced back and was surprisingly robust in the face of COVID-19.
She said this was also reflected in the recovery of the equity values of major lithium, nickel, copper and cobalt producers since the outbreak of the coronavirus.
“They all recovered much faster and in a much better way than if you were to benchmark them against their industrial metals peers,” she said.
“If you look at the companies who are more aligned with the battery and EV schematic, you will see their equities recovered better than their non-EV schematic peers.”
Ms Lu said the Chinese government’s response to the COVID-19 crisis over the coming months would be of great interest and, while the road to recovery may be opaque, recovery would mostly revolve around virus containment, targeted measures to restore production and the roll-out of macro stimulus – both fiscal and monetary.
