Shares in BHP Group PLC (LON:BHP) had dropped by just over 4% by midday on Monday, in the wake of widespread bearishness about the impact of the coronavirus on the Chinese economy and the knock-on effects it’s likely to have on the wider world.
China currently accounts for around fifteen per cent of global GDP, and is the world’s largest buyer of commodities. It consumes around 50% of the world’s copper, around 45% of the world’s steel and around 14% of the world’s oil.
In its steel consumption it accounts for significant nickel, iron ore, vanadium and zinc. In 2017, the country was reckoned to have consumed more than 50% of the world’s annual coal output. And, for those with an environmental bent, it’s also become a major player in lithium, with Chinese companies very active abroad in making acquisitions.
All this demand has been fueled by the relentless growth of the Chinese economy, which, until the coronavirus hit, had been forecast to come in at around 6% this year.
But that’s the real rub – now that coronavirus has hit, what will Chinese growth be? And by extension, what will global GDP be? There’s now a distinct possibility that all previous forecasts and models will have to be thrown out of the window, as more than 50mln people face a travel lockdown, deaths rise, and global anxiety spreads.
The tangible effects of the disease are alarming enough. But the uncertainty as to what will happen next has lead markets into bearish mode. BHP’s fall was matched by a 4% decline in the Glencore (LON:GLEN) price, a 4.5% decline in the Rio Tinto price (LON:RIO), a 4.8% decline in the Anglo American (LON:AAL) share price, and a 3.9% decline in the Antofagasta (LON:ANTO) price. Vale’s depository receipts were also trading down, ahead of the US open.
Of course, with China closed for its New Year festivals, it’s hard to get a clear steer from investors on the spot. So for the time being international investors are taking no chances. Spot gold has moved up past US$1,580 as safe haven buying boosts the price and the VIX Volatility Index has ticked up too. Silver was also higher.
How long this black swan volatility will last is anyone’s guess. Many pundits are pointing to lessons learned from the SARS virus 17 years ago, but there may be limits to how far the comparison is valid. For one thing, we don’t yet know the extent or the virility of the coronavirus. But perhaps more pertinently for markets, the Chinese role in global economic activity was much less significant back then.