The Wall Street Journal - 06.03.2020

THE WALL STREET JOURNAL. Friday, March 6, 2020 |B9

supply of raw materials like

manganese and equipment like

refractories, the European

Steel Association recently

said. Some steelmakers in

North America and Europe

have reported that the virus is

testing their supply lines.

Steel’s two biggest ingredi-

ents, metallurgical coal and

iron ore, are mined around the

world, giving steelmakers a

range of suppliers. Manganese,

which helps strengthen steel,

is mined in South Africa, Aus-

tralia and other countries. But

to be used, it needs to be pro-

cessed into alloys, and China

produces 97% of one of those,

manganese metal, according to

CRU Prices, a commodities

pricing firm.

One European benchmark

manganese metal price is up

around 30% since mid-Janu-

ary, when coronavirus began

to hit world headlines, while a

U.S. benchmark has risen

around 23%, despite the fall in

the price of copper, zinc and

other metals in that period.

Production of manganese

metal was slow to restart fol-

lowing China’s Lunar New

Year holidays, and there were

BANKING & FINANCE

Vanadium is another ob-

scure material used in steel-

making and dependent on Chi-

nese companies to process it.

Prices are also higher this

year, according to CRU.

Still, only around 5% of

steel uses vanadium, Mr.

Fowkes said. Steelmakers also

use other grades of magne-

sium. But magnesium metal is

particularly important for

those who supply the auto

sector and stainless steelmak-

ers in South East Asia, the

consultant said.

Chinese inputs into the

steel industry don’t stop with

raw materials. Finland’s Outo-

kumpu Oyj, one of the world’s

largest stainless steelmakers,

is watching for pressures on

the supply of refractory mate-

rials. China is one of the big-

gest suppliers of these materi-

als, which are used as heat

resistant materials to line

equipment.

The supply of electrodes,

which conduct electricity

through steel furnaces, is an-

other piece of equipment coro-

navirus could affect, said

Catherine Cobden, the presi-

dent of the Canadian Steel

Producers Association.

Meanwhile, analysts predict

a falloff in global steel demand

and say that as China’s de-

mand for steel has declined,

its steel has stockpiled and

could eventually depress

global prices.

Commerzbank expects

global passenger vehicle pro-

duction to fall 5.5% this year,

against a prediction of a 0.6%

decline before coronavirus

spread. The automotive indus-

try accounts for 12% of all

steel demand.

Vehicle sales in China, the

world’s biggest market for

cars and a key market for

global auto makers, cratered

92% in the first 16 days of

February, according to the

China Passenger Car Associa-

tion.

—Bob Tita

contributed to this article.

China has long been the

world’s dominant steelmaker,

but the spread of coronavirus

has exposed how dependent

some global producers are on

specialized Chinese raw mate-

rials to make the metal.

China provides or refines

around 97% of the steelmaking

ingredient manganese metal

and a large slice of silicon and

other key raw materials.

Prices of these resources rose

sharply in January, when the

spread of the novel coronavi-

rus hampered refining and

distribution of steelmaking in-

gredients in China.

Some global steelmakers

fear these materials will be in

short supply if the impact

from coronavirus on logistics

and workforces continues

much longer.

Around the world, indus-

tries including pharmaceuti-

cals, electronics and retail are

struggling as producers try to

source key materials and com-

ponents from China.

In the U.S. and Europe,

steel companies have success-

fully lobbied their govern-

ments in recent years for tar-

iffs to block steel imports

from China, but the epidemic

has revealed how some of

them rely on Chinese imports

of raw materials and steelmak-

ing equipment.

Such supply concerns add to

worries that, as it erodes eco-

nomic growth, coronavirus will

sap demand for steel from key

customers like auto makers.

“There are things that go

into steel that [no layman]

knows about, the small addi-

tives, many of which come

from China,” said Peter Da-

vies, co-founder of Original

Steel Services Ltd., which

owns several U.K.-based steel

companies. “Until recently, it

never crossed the sector’s

mind, that anything like this

would happen.”

There are indications that

coronavirus is affecting the

BYALISTAIRMACDONALD

Steelmakers Rely Heavily on China

A steelmaking facility in Hebei, China. China not only produces steel, but also makes a lot of the raw materials other steelmakers use.

ZHANG XIUKE/SIPA ASIA/ZUMA PRESS

China

9milliontons

India

9

Japan



U.S.

7

S. Korea

7

All others

56

Sources: CRU Group (price); World Steel Association (production)

GLOBALCRUDESTEELPRODUCTIONIN2018

Pricesofsteelmakingingredientsshotupamidconcerns

coronaviruswilldisruptsupply.

PRICEPERFORMANCESINCEJAN.14

Manganese metal

Ferrosilicon

Ferrovanadium

Aluminum

Nickel

Copper

3%

7%

%

–%

–7%

–9%

The list of institutions chal-
lenged by the impact of the
coronavirus now includes
America’s pension funds.
State and local government
retirement systems face the
difficult task of trying to plug
funding gaps while protecting
against investment losses. The
past two weeks of falling bond
yields and heightened stock-
market volatility have made
that job even more compli-
cated.
Pension funds have for
years been piling into stocks
to try to reduce shortfalls af-
ter a decadeslong slide in
bond yields slashed the re-
turns they could expect from
their fixed-income portfolios.
Today, stocks make up nearly
60% of pension fund assets, a
13-year high, according to da-
tabase Wilshire Trust Universe
Comparison Service. Block-
buster returns from the dec-
adelong bull market have
helped mitigate deep reces-
sion-era losses.
But this week, fears about
how the novel coronavirus will
affect the economy drove the
yield on the 10-year Treasury

below 1% just as stock volatil-

ity shot up on the heels of a

massive selloff. Now pension

funds are faced with even

lower bond yields and no as-

surance that the equity market

will rescue them.

The funds, which serve po-

lice officers, teachers and

other public workers, likely

shrank by a ballpark figure of

3% to 5% over the past few

weeks, said Steve Foresti, chief

investment officer for Wilshire

Consulting.

“Investing is a really easy

business until you go through a

correction,” said Jonathan Gra-

bel, chief investment officer of

the Los Angeles County Em-

ployees Retirement Association.

A sustained drop in pen-

sion-fund returns can strain

the budgets of states and cit-

ies, since many are already

stretching to shore up retire-

ment funds. Public pension

funds held about $4.5 trillion

as of Sept. 30, according to the

Federal Reserve. That is $4.3

trillion less than the value of

promised future benefits.

The past few weeks of vola-

tility have affected even one of

the nation’s better-funded

pension plans, the New York

State Common Retirement

Fund. The fund manages about

$226 billion on a fiscal calen-

dar that ends March 31.

“We felt pretty good about

reaching our target,” Chief In-

vestment Officer Anastasia Ti-

tarchuk said in an interview

Tuesday. “Now it’s more dubi-

ous.”

The current market environ-

ment also creates particular

problems for corporate pension

funds, which operate under

stricter rules than public funds

about how to assess their lia-

bilities. Pension funds managed

by public companies use a cor-

porate-bond rate to calculate

the value of their future obliga-

tions so those obligations be-

come more expensive as fixed-

income rates fall. On top of any

stock losses, corporate plans

could also be looking at higher

liability figures.

“The combination trans-

lates to the company writing

bigger checks to the pension

plan over the next few years

and to higher pension expense

charges,” said Dave Suchsland,

an actuary at Willis Towers

Watson.

U.S. corporate pension

plans’ aggregate funded ratio

fell to 81.7% in February, ac-

cording to Wilshire Consult-

ing, meaning the pension

funds have 81.7 cents on hand

for every dollar of liabilities,

almost 4 cents less than a

month ago.

Public funds calculate their

liabilities using a higher rate

than corporate plans, averag-

ing around 7%. That pressures

funds to pile on risk in order

to deliver returns high enough

to bring assets in line with lia-

bilities.

As the bull market ground

on, many public pension funds

took steps aimed at protecting

themselves in a downturn.

They rolled back assumptions

about how much they would

earn on investments, shifted

money out of some riskier as-

sets and tried to preserve

their access to cash for when-

ever bargains materialize.

The Los Angeles County

fund, which has a funding

level of nearly 81%, reduced its

target public-equity holdings

by more than 10% in 2018,

shifting some of the money

into credit investments such

as bank loans and emerging-

market bonds, Mr. Grabel said.

The California Public Em-

ployees’ Retirement System,

the nation’s largest pension

fund, whose funding level is

around 70%, has tweaked its

stock portfolio in an effort to

mitigate the impact of a down-

turn and added interest-rate

sensitive Treasurys in the past

several years, a spokesman

said.

But as bond yields have

fallen steadily over decades,

trying to limit market losses

without sacrificing returns has

become a tightrope walk for

public investment officials.

“We’re in that bind,” said

Sandy Matheson, executive di-

rector of the Maine Public Em-

ployees Retirement System,

which has a funding level of

82%. “You can’t earn 40% or

50% of your expected return

off fixed income.”

BYHEATHERGILLERS

Market Volatility Shakes Pension Funds

Sources: Wilshire Trust Universe Comparison Service (assets) ; California Public Employees'

Retirement System (market value)

*Data reflect holdings as of Dec. 31.

Public pensions median share

of assets*

60

20

30

40

50

%

’10 ’15

Equity

Fixed income

Market value of Calpers

$410 billion

380

390

400

2007 February March

Ad Agencies Pained

By Travel Downturn

SellersonAmazonarehikingpricesforvirus-killingsupplies.

*Clorox Scentiva Disinfecting Wipes, Pacific Breeze & Coconut (70 count)
†Purell Advanced Hand Sanitizer, Refreshing Gel, 8 fl oz Sanitizer Table Top Pump Bottles (pack of 2)
Note: Figures are through March 4 and represent maximum prices on select days
Source: Keepa.com

Feb. 29

1stU.S.

death

Jan. 11

1stWuhan

deathreported

Nov. 2019 Jan. ’ 20 March Nov. ’ 19 Jan. ’ 20 March

0

10

20

30

40

$50

Third-partysellers Amazon

0

25

50

75

100

$125

Clorox wipes* Purell†

Price of select items on Amazon, by seller

ues to be fluid, and we are re-
supplying as quickly as possi-
ble,” CVS said in a statement.
A Walgreens spokesman said
the company is seeing tempo-
rary shortages in some stores.
Purell-brand hand-sanitiz-
ing wipes, sprays and soap are
among the most in-demand
items online and in stores. Par-
ent companyGojo Industries
Inc. implemented a “demand
surge preparedness team” in
December in anticipation of a
sales spike and began limiting
sales to retailers weeks ago in
an effort to ensure adequate
supplies to medical establish-
ments, which comprise Purell’s

Continued from page B1

“Falls in ad spending are a

sign companies are finding

things tougher,” said Emilie

Stevens, an analyst at Har-

greaves Lansdown PLC. “It’s

one of the first types of

spending to go when compa-

nies need to cut back.”

Ad agencyWPPPLC’s stock

has shed 32% year to date,

while rivals including France’s

Publicis GroupeSA have also

taken a battering.

“In March and April, we

have seen an impact from

travel advertising deferments

relating to the coronavirus,”

London-based ITV said in a

statement, adding that early

indications suggest a 10% drop

in advertising revenue for

April.

Restrictions on travel,

which have so far been far

more severe in China than in

Europe and the U.S., have al-

ready had an impact on some

advertising agencies. France’s

JCDecaux SA, which offers

outdoor advertising such as

displays inside transport hubs

and on billboards, has been

one of the worst hit. The stock

is down 26% this year.

The fallout from the coro-
navirus epidemic is threaten-
ing to weigh on advertising
agencies and media compa-
nies’ operations as the disrup-
tion to the global economy
from travel bans and quaran-
tines spreads further afield.
U.K. broadcasterITVPLC
warned Thursday that the im-
pact of reduced advertising
spending from the leisure and
tourism industry would hurt
its outlook. That sent its stock
down 10% in London, and ex-
tended its rout this year to
32%.
Businesses are paring back
ad spending amid a wide-
spread cancellation in travel
plans, as people back out of
planned cruises and holidays
as new epicenters emerge
globally for the disease. Cuts
to this kind of discretionary
spending, a metric of compa-
nies’ confidence that is often
closely watched by investors,
can sometimes signal that
there may be deepening con-
cerns about coming corporate
earnings.

BYANNAISAAC

biggest business segment, a

company spokeswoman said.

“This is the best way to get

product evenly distributed to

the places it is needed most,”

she said. “This approach also

helps prevent bad actors from

stockpiling and price gouging.”

CloroxCo., with a slate of

cleaning products that in-

cludes disinfectant sprays and

wipes, last week said it was

prepared for a surge in de-

mand. Its products were

among those either sold out or

in short supply at online and

bricks-and-mortar retailers na-

tionwide.

A Clorox spokeswoman said

the company has a disinfecting

product supply team working

to replenish supplies as

quickly as possible. On price

gouging, she said, “it’s very

disappointing to see sellers

doing this at a time when peo-

ple need access to disinfecting

products.”

—Dana Mattioli

contributed to this article.

Gouging

Strains

Amazon

problems moving metal to

ports, said Clare Hanna, a CRU

analyst.

German conglomerate

Thyssenkrupp AG said it

didn’t yet see constraints in

its supplies of manganese

metal or magnesium, another

ingredient of which China is

the main supplier.

“But we are monitoring the

situation very closely in order

to use alternative procurement

channels if necessary or to ex-

amine substitutes,” a company

spokesman said.

The majority of the silicon

that can be used to take oxygen

out of liquid steel is also pro-

duced in China. Since mid-Jan-

uary, the price of this ferrosili-

con has risen by about 15%,

said Kevin Fowkes, managing

consultant at AlloyConsult.

Chinese inputs into

the steel industry

don’t stop with raw

materials.