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Coronavirus Drags Down Commodity Prices as Demand from China Drops

06/04/2020 434 Readers

Coronavirus Drags Down Commodity Prices as Demand from China Drops

The chairman of the South Sumatra chapter of the Indonesian Rubber Producers Association (Gapkindo), Alex K. Eddy, said fear over the Wuhan coronavirus was weighing on what was already slow economic activity in the East Asian country during the Chinese New Year holidays and weak global natural rubber prices in January.

"I think the impact of [the Wuhan coronavirus in Indonesia] has really been felt through the current price decrease," Alex told The Jakarta Post in Palembang, South Sumatra, in late January.

South Sumatra Plantation Agency data show that prices of 100-percent natural rubber fell by about 5 percent to Rp 16,290 (US$1.19) per kilogram on Jan. 24 from Rp 17,151 per kg on Jan. 20, while 60-percent natural rubber showed a similar decline.

Global rubber prices at the Tokyo Commodity Exchange have slipped around 17 percent so far this year. Meanwhile, coal and crude palm oil prices declined around 5 percent and 15 percent, respectively, over the same period.

Rubber, coal and palm oil are among Indonesia’s main export commodities and contribute a big chunk to the country’s foreign exchange earnings.

“The spread of the virus lowers demand while China is the world’s largest natural rubber importer,” said South Sumatra Plantation Agency processing and marketing head Rudi Arpian.

The 2019-nCoV virus has infected more than 24,500 people worldwide since it was first discovered in the Chinese city of Wuhan, with the death toll standing at 492 on Wednesday afternoon. Several countries, including Indonesia, have closed their doors to visitors from China to prevent the pneumonia-like illness from spreading, while many companies in China have suspended or curtailed business activities amid lockdowns in several cities.

The limited business activity in China will further affect demand for raw materials, forcing prices down, economists have said. This will hit Indonesia as a country that relies heavily on the export of commodities rather than finished goods.

“Falling commodity prices will worsen the country's exports and thus will widen the trade deficit," Center of Reform on Economics (Core) Indonesia research director Piter Abdullah said last week, adding that it would also affect household spending, as farmers and businessplayers would earn less.

Indonesia recorded a trade deficit of $3.2 billion last year, marking a significant improvement over the $8.7 billion recorded in 2018.

The country exported $25.8 billion worth of non-oil and gas goods to China in 2019 and imported $44.5 billion of non-oil and gas goods, resulting in an $18.7 billion trade deficit on Indonesia’s end.

China accounted for 25.85 percent of Indonesia’s total non-oil and gas exports last year, more than any other country, Statistics Indonesia data show.

Indonesian Palm Oil Association (GAPKI) chairman Joko Supriyono expressed concern that the virus spread would hurt China’s economy and thus hit palm oil demand.

The country exported 4.4 million tons of palm oil to China in 2018, making the East Asian country its third-biggest buyer, after India and the European Union.

"Our exposure to China is quite large. If [the Wuhan coronavirus outbreak] is only temporary, then there's hope to grow," Joko said at a press conference on Monday.

Editor: Joko Yuwono