March 2020


        Like a stowaway uncovered on a New Year’s Eve, the coronavirus has made a dramatic entry into this second decade of the 21st century: “We started with five hundred” (Chinese from the distant province of Hubei, far from Beijing and Shanghai) “but this quickly grew to three thousand” and not only Chinese, but also Iranians, Italians, Koreans and even some French people. There are therefore now more than 3,000 deaths from this new pandemic that the WHO has named ‘Covid 19’. At the beginning of March, the peak seemed to have been reached in China, but there may be some doubts as to the reliability of the figures. Whatever the case may be, the pandemic has become globalized with cases in independent households in Asia and Europe. Admittedly, the impact on human life is limited, less than that of the classic flu epidemics, but fear is gaining ground at a time when rumours circulate as quickly as information. The necessary preventive measures taken by the political and health authorities further increase people’s anxiety… as well as anxiety in the markets.


        Since the economic impact of the coronavirus far exceeds its health dimension and its human toll, we can clearly see that it has caused a veritable globalization crisis. Triggered in China, the epidemic has highlighted the dependence of many industrial value chains on the world’s second largest economy. Since the death of Mao in 1976, the growth of Chinese industrial production has been on average more than 10% per year and we have entered the logic of ‘made in china’ for all or part of our phones, our cars, our clothes, our toys and even our Christmas decorations. And suddenly, people are no longer moving about, the planes, the regular movements of the shipping lines and their containers remain idle. Factories have stopped for lack of spare parts and supplies. The major trade fairs that bring professionals together from around the world have been cancelled. The Earth has stopped spinning!


        It is true that never in human history has the planet functioned as much as a “world space” in the sense given by Fernand Braudel when he spoke of Venice, Antwerp and Amsterdam; a space-world governed by an era of trade, the centre of gravity of which has shifted to the Pacific and China. In 1348, the world dominated by Venice and Genoa was brought to its knees by the Black Death spread by ships coming from Crimea, in the first era of globalization that followed upon barbaric times. Today it is from Wuhan, China, that this thunderclap has come.


        It is of course too early to assess the precise economic consequences. It is clear however that these will be all the more serious as the world economy was already in a slowdown phase with Japan, Germany and Italy among the advanced countries. South Africa, Mexico and Singapore are among the emerging countries that are close to, or already in recession. The United States created 225,000 jobs in January allowing Donald Trump to grandstand in his State of the Union address. However, the Fed has chosen to intervene forcefully by cutting its key rates by 50 bps. In China, where activity is probably more limited than we are being given to understand with the reopening of factories after the New Year holidays, Xi Jinping has opened the floodgates of bank credit, but it is clear that at least in the first quarter, activity will be limited and growth very weak.


        Commodity markets are a good indicator from this point of view. Here too, we should point out the bearish context marked at the edge of the surpluses on which 2019 ended. On the whole, the coronavirus accentuated the downward trend, but less dramatically than expected since Chinese imports have basically weakened little.


        Thus, for oil, certainly the year started at $70 per barrel of Brent, but it was the day after General Soleimani’s death in Baghdad, at a time of great tension (and at other times, the barrel would have soared above $100). The market was in excess of more than a million barrels/day. The fall in prices to $50, despite the worsening situation in Libya, was due to the expected decline in world consumption growth in 2020 and then to the decline in refining activity in China. For natural gas and especially LNG, the fall in prices was much earlier, but the ‘force majeure’ declarations by Chinese buyers for a few LNG cargoes were the last drops pushing spot prices in Asia below $4 per MBtu.


        The coronavirus claimed its first major victim in the markets before March. It caused—albeit indirectly—the break-up of the Moscow-Riyadh axis which, with OPEC+, had contributed to a certain stability in the price of oil in the $60/$70 area for a period of two years. It was also a geopolitical axis allowing Vladimir Putin to maintain a certain balance between Ryad and Tehran. But in Vienna on 6 March, Russia refused a further reduction in production quotas desired by Saudi Arabia (1 Mbd for OPEC, 500,000 bd for Russia and its allies). OPEC+ no longer exists. In response, Saudi Arabia decided, as in 2014, to play the oil counter shock card by cutting prices. On 9 March, a barrel of Brent opened in Asia at $36! In a surplus market, the tumble could be tough… Goldman Sachs, whose specialty is changing forecasts as quickly as shirts, now estimates that a barrel of Brent will remain around $30 until the end of the year.


        Most of the industrial raw materials markets have been affected, but to a lesser extent than expected. Thus, iron ore, which is very symbolic of China’s import weight, has remained firm beyond $85 per tonne and steel prices in China have even gone up a little in the prospect of a probable economic recovery (the ‘V’ recovery). As for agricultural markets, the impact of the coronavirus remains rather limited there except that the Chinese are lagging behind in the ramp-up of their imports from the United States.


        As usual in times such as these, gold is doing the best at above $1,600 an ounce while palladium continues to prance around above $2,500 an ounce. The most spectacular drop at the start of the year can be attributed to the sea freight market in its three components (containers, tankers, dry bulk), but especially for the most important bulk carriers (Capesize). There is, of course, a drop in trade there, but above all there are also the unintended consequences of the transition to the new IMO standards for marine fuels.


        By focusing all of the media and political attention, the coronavirus has at least had the merit of putting other tensions on the planet in the background. China seems to have played the game in terms of lowering its tariffs in favour of the United States and Donald Trump has shown, for a few weeks, an unusual restraint in his tweets vis-à-vis the “rest of the world”. It is true that the progress of the Democratic primaries must please him as well as the victories of his ‘friends’ Johnson and Netanyahu. Meanwhile, the “dirty war” continues in Syria, Libya and Yemen. But at least, the carbon emissions of the planet have abruptly decreased… Unfortunately, the fall in oil prices is not going in the same direction.


        It is in this context that the CyclOpe team is preparing the publication of our thirty-fourth edition, CyclOpe 2020.


        A curious anecdote in the story – we had decided a few weeks ago, before the coronavirus, to give this edition the title ‘L’allegoria del cattivo governo’, after a fresco painted in Siena by Ambrogio Lorenzetti who ten years later in 1348 became himself a victim of the Great Plague. CyclOpe 2020 will be released on 12 May, 2020, as—hopefully—the world will begin to recover from this first great pandemic of the century. At least that’s what we are all wishing for in this period of Lent.


Philippe Chalmin


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