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China Direct - Daily Recap

By: Darin Friedrichs, Senior Asia Commodity Analyst

2020-02-03

Today saw a very rough re-opening to the Chinese markets as the coronavirus risk gets priced.

Shanghai composite ended down 7.72% and onshore RMB was weaker to 7.02 per USD compared to 6.84 on January 20th.

Corn closed higher on the day compared to the rest of the commodities space that sold off. Corn is a bit unique in this space because although the virus outbreak will affect demand, it will also affect supply. Rural areas are retrenching including transport bans and closure of rural roads. This creates a logistical mess that will limit supply available to the market.

Dalian meal opened on its lows down 5% and was able to recover slightly and settle down 3.4%. A lot of plants are still waiting to restart which is creating problems. This year, stocks levels for soybeans and meal have been low so there just isn’t much supplies available until the plants restart. Additionally the market had been trending lower into the start of the holiday, so most people didn’t want to carry large positions. Now that this holiday has been extended it’s creating problems.

This is going to create massive problems in the livestock sector. Even if a local plant has resumed operations, it will still be longer than normal for delivery due to logistics problems (lack of labor, road closures, road checks). If the plant doesn’t resume until the 10th, and then you consider additional delivery times, this supply might be available 1-2 weeks later than expected. Bloomberg reported last week that Hubei’s chicken industry was in a dire situation with limited feed available. It seems like Hunan is also having a similar issue.

Consider that many farmers faced losses due to ASF. Some then switched to raising poultry, which then had bad returns. Now some of the them are potentially facing flock or herd losses due to lack of feed. This is obviously negative for feed demand.

Additionally egg futures were limit down 7% the entire day and never even traded up a single tick. At the close there were 40.8k contracts offered compared to the daily volume of 33.5k.  

Palm oil was limit down 7% the entire day. Soybean oil briefly traded slightly above limit down, but ended the day limit down 7% as well.  

As I noted in my pork update today, supplies are notably limited in Shanghai. Local shops in my area are still sold out. Online delivery services have a very small offering of mostly frozen imported products at relatively high prices. This will continue to keep demand under pressure.

My local state-owned bank was open again today and seemed to be running normally with the exception of a temperature check when you enter. Although when I asked about converting RMB to USD or doing international transfers, they said “the system is down” until February 10th.  I’m guessing they’re just turning away any retail customers in an attempt to limit capital outflows as the currency and markets fall.

 

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