Disruption associated with the outbreak of the novel coronavirus COVID-19 in China will impact precious metal demand across a range of end-uses, including cars and auto parts, electronics and jewellery.
Wuhan, the city at the heart of the outbreak, is a major Chinese automotive hub. The region is home to many car manufacturing plants which have been impacted by government-mandated shutdowns over the past two weeks, including Dongfeng Motor Group, one of the largest joint-venture automakers in China. Plants in nearby provinces and countries have also been affected, with difficulty sourcing Chinese components.
Shutdowns and supply chain bottlenecks could lead to 1.7 million fewer cars being produced in China this quarter (source: IHS Markit). This marks a 27% decline year-on-year. China is the largest automaker in the world, with 21.4 million passenger car units sold in 2019 (source: CAAM), accounting for more than 20% of global palladium demand. Downtime is expected to recoup throughout the year, but auto production is estimated to fall as much as 5% this year, by around 800,000 units (source: China Passenger Car Association). This equates to around 100 koz of palladium and 10 koz of rhodium, which, while not enough to shift the markets into surplus, could alter buying patterns and cause more volatile price movements in the short term.
Gold and platinum jewellery sales will decline sharply in Q1. Many jewellery stores and fabricators in China are closed, but even once restrictions are lifted, many consumers will be reluctant to enter public places such as shopping malls. Initial estimates indicate that jewellery retail sales in China will fall by 50% in the first two months of 2020, which could reduce platinum jewellery demand by around 80 koz, and gold jewellery by around 1.9 moz.
However, outside of China, gold is supported by safe-haven demand. Gold ETF holdings have increased by 1.9 moz since the start of the year. The full impact on demand will not be clear until production resumes. Capacity utilisation rates across most industries are likely to remain low until March at the earliest, with logistical bottlenecks causing further delays. Damaged consumer confidence will continue to impact demand for several months after the virus is contained.