The outbreak and contagion of a new strain of the coronavirus – which began in the Chinese city of Wuhan in December – has contributed to renewed concerns over economic growth prospects, particularly in China.

China, which is a major supplier and consumer of base metals as well as a major importer of iron-ore from seaborne markets for its domestic steel industry, accounts for roughly 53% of global steel production.

In a statement on Wednesday, ratings agency Moody’s said that, given the importance of economic expectations for China to the base metals and iron-ore industries, market sentiment had turned negative and prices were retreating sharply.

Since the end of December, metal prices have dropped noticeably, while prices of copper, a leading indicator of gross domestic product (GDP) growth expectations, fell about 9.7% from December 31 to January 31.

According to Moody’s, this is a reversal after the US–China “Phase one” trade deal, which gave base metal prices an upward bump near the end of 2019.

“Last year was challenging for the industry with trade tensions and geopolitical and economic concerns dominating market sentiment and prices remaining rangebound for most of the year, before turning upward in December. While aluminum, zinc and nickel have differing drivers affecting their fundamentals and price movement, they were not immune,” said Moody’s.

Moody’s added that all of these commodities had seen a price decline since the middle of January, although aluminum and zinc's declines were more moderate than nickel's.

Although the overall fall in nickel prices was not dissimilar to that seen for copper, the ratings agency noted that the downward trend was more moderate and that prices responded much more quickly and meaningfully to the downside compared with the SARS outbreak in 2002/3, because Chinese supply and demand factors and expectations regarding economic growth in that county were now much stronger influences on the sector today.

Iron-ore prices in the seaborne market climbed significantly through August 2019 on reduced supply following the tailings dam collapse at Vale SA's iron-ore mine in Brumadinho, Brazil, earlier in the year, before moderating somewhat.

Still, they remained elevated on increased steel production in China, which was up around 8% to about 996-million tons in 2019.

This mineral's more favourable trend also reversed since the coronavirus outbreak, with the seaborne price dropping about 11% through the month of January, according to Moody’s.

As a result, the industry outlook is already pointing to slower global economic growth.

Moody’s said its stable outlook for base metals for 2020 had already contemplated a challenging macroeconomic operating environment for the global base metals complex on slowing global growth, “which is likely to be exacerbated given concerns over the economic impact of the coronavirus”.

Purchasing managers' indexes (PMIs) in the US and Eurozone have been below 50 since August 2019 and December 2018, respectively, whereas China's PMI has hovered around 50 for the last several months.

Moody’s also forecast that reduced manufacturing activity and lower construction and infrastructure investment would hurt demand across the base metals and iron-ore complex and potentially change the dynamics where deficit positions existed in 2019 to either bring metals into a surplus position, or create an even greater surplus than forecast for this year — which would be to the further detriment of prices.

While all producers will be affected, smaller companies at the low end of the rating scale and single-commodity producers will see the effects sooner than larger more diversified miners, Moody’s added, highlighting that companies with a material percentage of their revenue derived from sales into China would be hit by both price and unit sales declines.

Overall Moody’s said the macroeconomic ripples from coronavirus outbreak would be far-reaching and, while the primary effect of coronavirus is on human health, the risk of contagion is affecting economic activity and financial markets.

“The immediate and most significant economic impact is in China, but will reverberate, given the country's importance in global growth as well as in companies' global revenue.”

By sector, the coronavirus will likely have the largest negative impact on goods and services sectors within and outside of China that rely on Chinese consumers and intermediary products.

In Moody’s baseline, the expected effect of the outbreak is a temporary impact on China’s economy and for yearly GDP growth in China to remain in line with its forecast of 5.8% in 2020.

However, the composition of growth will likely shift, because of a dampening of first quarter consumption, potentially offset by stimulus measures. Nonetheless, Moody’s said there was still a high level of uncertainty around the duration and intensity of the outbreak.

Owing to this, the agency will review its macro forecast as conditions evolve.