The economics team at Bank of America has cut its 2020 global growth forecast to 2.8% “while also factoring in a mini recession.”
“Logistics and supply chains remain an issue, without normalisation, multipliers from fiscal/monetary stimulus would be low,” Bank of America said in a March 3 research note.
The outbreak of the coronavirus – now called Covid-19 — has had a “pronounced impact.” For mined commodities, the disease outbreak “pushed the copper:gold ratio back to levels last seen during the Great Financial Crisis.”
China’s Purchasing Manager Index (PMI) – a proxy for demand from the manufacturing sector – fell to 35.7% in February, the report noted.
“This week’s average U.S., China and Eurozone manufacturing PMIs would justify copper quotations 40% lower year-on-year at US$4,200 per tonne (US$2 per lb.), highlighting how extraordinary the supply shock has been,” the bank’s economists wrote. “In our view, prices have not fallen to that level, partially over expectations that monetary and fiscal stimulus in both China and the Western world will ultimately come to the rescue.”
But logistics, the report continued, “is the key issue and difficult to stimulate away.”
The bank pointed to weak data from China’s ports as a “concern” and underscores how Covid-19-related disruptions have impacted global supply chains.
“Indeed, as long as logistics (and staff attendance in factories) have not normalised, the multipliers of any fiscal and monetary support will likely remain low.”
Bank of America noted that if one uses the OECD’s bear case of 1.5% global growth this year, “the copper market surplus would reach 806,000 tonnes, justifying average 2020 quotations of US$4,424 per tonne (US$2.01 per lb.).”
“At present, we forecast a roughly balanced copper market,” the report’s authors stated. “Yet, the data highlights that any further downgrades in global activity would increase the supply overhang. To that point … copper would average around US$5,100 per tonne (US$2.31 per lb.), if the global expansion rate fell to 2%.”
In addition, the bank’s China team has cut steel demand growth to -0.8% from the previous 2.5%, and said that with demand for steel dropping in the first quarter by as much as 10-20%, and larger inventories, it expects steel prices to drop 4-5% in 2020.
The good news it said is that “activity should ultimately recover” as the number of Covid-19 cases start to peak, logistics get back to normal, and fiscal and monetary stimulus does its job.
“While we have broadly reduced near-term forecasts for the base metals, we maintain fourth quarter 2020 expectations, with copper prices set to average US$6,750 per tonne (US$3.06 per lb.) then.”
The bank also remains bullish on gold with a forecast of US$1,700 per oz. in the fourth quarter of the year.
“Gold has come under pressure in the past week, but this has not changed our structurally bullish view,” the report said. “Indeed, issues including changing global geopolitics, de-globalisation/the simmering trade dispute, and demographics all imply that actual and potential global GDP growth are set to remain subdued. This will limit the ability of central banks to raise interest rates any time soon. In fact, falling 10 year U.S. rates have pushed gold higher of late and today’s 50 basis point rate cut by the Fed with more likely to come will in all likelihood still extend the rally. A more dovish Fed should also limit US dollar gains.”
Bank of America has lowered its 2020 price estimates for aluminum to US$1,786 per tonne from its earlier estimate of US$1,830 per tonne; for copper to US$2.75 per lb. from US$2.81 per lb.; for lead to US87¢ per lb. from US91¢ per lb; for nickel to US$6.63 per lb. from US$7.88 per lb.; and zinc to US99¢ per lb. from US$1.05 per pound.