BHP Sees Next Six Weeks as Key For Virus Hit to Commodities

(Bloomberg) -- BHP Group warned raw materials demand and prices will take a hit on lower growth in China if the fallout from the coronavirus outbreak extends beyond the end of next month.

The world’s biggest miner flagged China’s construction and manufacturing sectors need to return to regular operations in April to ensure that existing disruption can be made up for before the end of year.

If the impact of the outbreak can’t be contained this quarter, annual growth forecasts will need to be revised down, Huw McKay, BHP’s vice president of market analysis and economics, said Tuesday in a blog post. “This would then flow directly through to lower commodity demand and price expectations.”

BHP forecasts China’s growth to slow to about 6% this year and as low as 5.75% in 2021 based on a swift recovery from the virus outbreak. In a worst-case scenario that combined a lingering impact from the virus and a re-escalation of trade war tensions, the nation’s economic expansion this year could slip to 5.5%, the miner said.

Goldman Sachs Group Inc. and Macquarie Group Ltd. are among banks who’ve cut China growth forecasts for both the first quarter and the full year as a result of the outbreak. China’s gross domestic product will grow 4% in the first quarter, according to the median of 18 forecasts since Jan. 31, which would be the lowest level since 1990.

Read more: China’s Economy Seen Growing Slowest Since 1990 on Virus Hit

While BHP’s new Chief Executive Officer Mike Henry told reporters the producer hasn’t experienced any major impact to demand from China so far, caution over the virus outlook led the company to take a more conservative approach on its first-half dividend payment. Potential negative impacts for commodities markets have “barely been priced in,” according to Citigroup Inc.

A decision to pay out a lower proportion of earnings compared to a year earlier reflected “caution due to near term market volatility driven by the 2019 coronavirus disease outbreak, trade policy and geopolitics,” BHP said in a separate statement, as it posted first-half earnings that jumped 29%.

The miner said it expects annual crude oil demand to decline by about 200,000 barrels a day as a result of disruption so far, a figure that may rise further.

If virus impacts are contained by the end of March, consumers of materials such as steel and copper should fully recover from the second quarter -- and potentially operate at higher than usual rates -- meaning that overall materials demand in 2020 will be unaffected, according to BHP’s McKay.

About 90% of China’s steel production, more than 80% of auto production and floor space under construction and 80% of infrastructure investments are located in provinces with announced restart dates before the end of February, he said.

To contact the reporter on this story: David Stringer in Melbourne at dstringer3@bloomberg.net

To contact the editors responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net, Keith Gosman, Phoebe Sedgman

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