(Bloomberg) —

China’s accumulating a vast stack of commodities that’s threatening markets already hammered by the coronavirus.

As the government compels the country to get back to work, oil refineries are churning out diesel and gasoline while smelters and other industrial plants continue to process raw materials into finished products like steel and .

But they’re not being used quickly enough. Consumption has shrunk as people stay at home and travel less, and as logistical constraints stop output from reaching end-users.

So the commodities are piling up outside plants, in warehouses and storage tanks. Inventories of steel products this week surged to a record, while copper supplies at warehouses tracked by the Shanghai Futures Exchange expanded to the highest ever for this time of year. Gasoline and diesel stockpiles are expected to get close to their theoretical capacity this month.

That can’t go on forever. Space will eventually run out or the financial burden of holding so much inventory will get too much. The plants will either have to de-stock by selling off their products or cut production, which would reduce demand for raw materials such as crude and iron ore. Either way, it would be a blow to prices already hammered by the virus.

“Producers won’t involuntarily stock forever if they are not selling their products as this would be a cash flow negative exercise,” Max Layton, managing director for commodities research at Citigroup Inc (NYSE:)., said by email. “This refers to all metals where underlying consumption has suffered from the impact of the coronavirus, which is all metals bar gold and silver.”

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In a sign of how desperate the situation is getting, China’s top nonferrous-metal industry association on Thursday called on the central government to buy metals from smelters to alleviate pressure from rising inventories. The extended shutdown of customers’ plants has reduced demand, causing inventories to swell and prices to weaken, according to the China Nonferrous Metals Industry Association.

Fees for physical copper deliveries tumbled to a discount of 235 yuan per ton as of Feb. 20, down from 50 yuan five days earlier, data from industry consultancy shmet.com shows. They were at a discount of 130 yuan on Friday.

The steel industry is also under pressure. Mills have been reining in output as demand has fallen, but there are limits to how much they can cut without closing down furnaces entirely, a complicated and costly move. Steel product prices have fallen more than 5% since the Lunar New Year holiday in January when Beijing shut down swathes of the country. has fallen about 10%.

Should mills start to restock inventories, steel’s losses could accelerate.

“There could be a price drop as traders and mills compete to shift material out from inventories as fast as possible,” said Tomas Gutierrez, a Shanghai-based analyst at Kallanish Commodities Ltd. Inventories are “definitely at unsustainable levels,” and it’s a “big problem,” he said. There are always options to extend or convert storage, but that comes at a cost.

Any price correction would probably be short-lived, according to Gutierrez. Mills have already been cutting back production and a further drop in prices would encourage deeper cuts, helping inventories draw down. That could happen one to two weeks from now, he said.

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And the demand side may also start to improve as Beijing gets the country running again, which would help reduce inventories, said Xiao Fu, head of global commodities strategy at BOCI Global Commodities.

“There are signs that the situation is coming under control, and that industrial activity is restarting, which would help to de-stock products,” she said.

The travel restrictions have hammered the oil market, with stockpiles nearing capacity despite widespread production cuts by refiners across the country. China’s fuel inventories would typically be about 30 million to 40 million tons at this time of year, according to industry consultant SCI99, but are on track to hit 56 million tons this month. That would take them close to 80%-85% full, their theoretical capacity, it said. and diesel retail prices are at the lowest since 2017.

Chinese oil companies have been looking overseas to help alleviate the glut. The trading arm of China’s biggest oil refiner last week made a rare booking to ship diesel to Europe, and traders are expecting flows to increase. While that may ease the pressure on domestic prices, it could be another headwind for overseas markets.





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