Metals & Mining, COVID-19 and other pandemics
One of my favourite movies is Terry Gilliam’s Twelve Monkeys, an apocalyptical vision of the virus-induced demise of almost all humanity. When one of the main characters is introduced, the above painting of the Ideal City by Fra Carnevale is shown. Its beautiful composition of Greco-Roman architecture impresses by its clarity and beauty, but also by its almost entire absence of people. In the shadow of the COVID-19 pandemic, this picture is now eerily familiar to many of our Italians friends who are in lockdown. They, as much as we all, hope for the speedy end of this pandemic flu. The loss of life is already substantial and the economic consequences can be felt around the world. While the death toll keeps climbing, it also causes millions of people face joblessness and financial hardship, while the first businesses are close to bankruptcy. More uncertainty is still to come and economists already debate if a V, U or L shaped recession is looming.
While I am not smart enough to partake in this macroeconomic discussion, I know something for sure – human kind has been through many serious influenza outbreaks before. Since I am mostly interested in the metals and mining sector here, I compared these outbreaks with the latter’s performance, exemplified by the MMI indicator I introduced earlier. As we can see below, a specific pattern emerges when we superimpose known flu pandemics on it.
It appears that many of the observed flu pandemics coincided with a downturn in M&M sector activity. While this does not imply causality, the very coincidence is certainly striking. So lets therefore assume for a moment that there might be an indirect link between sector performance and pandemic flu outbreaks. After all this would not be so far fetched, since pandemics usually go along with a curtailment of demand for goods (as we can see right now). This curtailment results in a softening of prices for these goods and implicitly also a price reduction of their required raw materials, such as metals. The question becomes now how long such altered price regimes lasted and how deep prices actually fell during previous pandemics.
Revisiting the above chart we can already see that the observed dips in the performance of the M&M sector took two to three years to resolve after the onset of the more severe pandemics. In terms of price drop we turn to the one metal that is the most indicative for the economic condition of the world economy – Dr. Copper. When we compare its relative price behaviour since the last price peak at the beginning of the last four severe pandemics, the following picture emerges.
We can see that prices dropped pretty quickly after the start of flu pandemics. It appears that copper prices fell between 25 and 45% during the first months of such onsets. The current price drop of about 24% since December is therefore in line with past developments. However, as we can see, a further price drop of an additional 20% (ie. up to 1000 USD/t or ~50USc/lb) cannot be discounted – and this within a small number of months.
The road to recovery also seems to be rocky at best. Taking the most recent severe pandemic ie. the Hong Kong flu of 1968 as an example, prices might return to December 2019 levels only within two years. This prospect cannot be very encouraging for industry executives and employees alike.
However, we need to remind ourselves of a couple of things with respect to this quick analysis. First, the Hong Kong flu happened already half a century ago. Our scientific knowledge and economic understanding has improved tremendously since then. Therefore we can truly hope that the shown historic analogies cannot entirely be applied onto the current situation. Moreover many countries have already introduced social distancing, with vaccines being developed faster (and some are already tested), and while lifesaving equipment can be produced quickly using 3D printing technologies. Finally the world economy is supported in a concerted global effort by fiscal and monetary policy changes. These actions can make a huge difference.
Hence we should still be hopeful that we tackle this pandemic in a faster fashion than previous outbreaks. Each of us can do our share to accelerate the onset of recovery in reducing the severity and length of the COVID-19 outbreak. So lets reduce our physical contact with others for now and equally important, wash our hands frequently.