Event

As the Coronavirus is spreading across and outside China, and taking its toll in terms of the number of people infected and the number of deaths caused, its impact on the economic side is also expected to be significant and widespread. Besides the domestic shock due to the drop in consumption, shutdown of industries and paralysis of transports, other channels should impact companies outside China via:

  • disruptions in supply chains worldwide given China’s dominant position in the global manufacturing sector; 
  • reduced goods exports towards China as the local industry is running at a slower pace; 
  • losses in tourism revenues.

Impact

In China, the provinces which have been affected so far by plant shutdowns account for the bulk of the manufacturing industry. While China officially returned to work on 10 February after the authorities had prolonged the Lunar New Year holiday by 1 week, many companies still haven’t resumed production as a precautionary measure to contain the contagion, or they’re imposing lengthy quarantines for people who are returning to their cities. While local authorities are still placing restrictions on workers’ movements, manpower shortages are observed. In the Hubei province, at the epicentre of the outbreak, authorities have asked businesses not to reopen before 14 February at the earliest. It’s impossible to predict when all businesses will be running as normal again.

Given the nature of the industries present in the affected provinces, the production in the automobile and the electronics and ICT sectors seem to be hit the most. Regarding electronics and ICT, shipments of devices, such as graphic cards and motherboards, are reportedly set to drop. The smartphone industry is badly impacted both on the demand side, as sales are hit by the consumption paralysis, and on the production side, by factory closures. More than one out of three factories supplying Apple for example are based in Chinese cities that are affected by plant closures. As for the car industry, most of the auto assembly plants and parts suppliers in China were closed until 10 February. In the meantime, some have restarted production although some others remain shut down. The production of the textile and heavy machinery sectors are also significantly impacted. 

As for services, while the domestic retail and catering sectors are under great pressure, transport services and airlines in particular have been immediately hit by travel restrictions and fear among passengers. Two-thirds of the Chinese airlines’ planes are reportedly grounded and cash-strained companies are looking for refinancing solutions. 

Outside China, supply chain disruptions in the above-mentioned sectors are expected since the world industry heavily relies on Chinese goods. For example, about 25% of global exports of electrical machinery and equipment come from China. More concretely, the outbreak caused Hyundai to temporarily halt the production in South Korea because the plants were running out of Chinese parts. As suppliers resumed production in China last week, most of the automaker’s plants in South Korea are expected to have resumed production by now. Last week, Fiat Chrysler was reported to have temporarily suspended production in Serbia because of disruptions in the audio system parts supply.

Difficulties to ship materials from China are also reported in textile factories in Vietnam and Bangladesh. 

Besides disruptions in supply chains due to a lack of intermediate goods from China, exports to the country are also expected to shrink. Intermediate goods imports from China should lower due to the slowdown of the manufacturing industry. Commodity products are already feeling the pain. Executives of some of the largest Chinese refineries estimate the demand for crude oil to decrease by 25% in February compared to last year. This represents 3% of the global crude oil consumption. As a result, crude oil prices have plunged and the Brent price decreased by about 15% since the beginning of the year. Chinese buyers of natural gas such as China National Offshore Oil Corporation (CNOOC), and possibly Sinopec and China National Petroleum Corporation, have also considered declaring force majeure in order to temporarily suspend their contracts. Several copper traders from China have scrapped or postponed shipments from Chile and Nigeria because of force majeure. Chinese companies will increasingly declare force majeure to terminate or breach the terms of a contract as the authorities are issuing force majeure certificates.

The impact of the epidemic on shipping is also starting to be felt. Ports of call in major Chinese ports have dropped significantly since mid-January. Many container companies announced blank sailings (sailings cancelled by a carrier, meaning that the vessel will not be available to discharge or load cargo) into China to avoid contagion of the crew and spreading the virus to other ports. These cancellations along with the lockdown in China imply that containers dedicated to the Chinese market can be either stuck on board ships, offloaded in alternative sites or stored in ports.

Last but not least, given the large number of Chinese people traveling abroad and fear caused by the virus, the worldwide tourism sector is also likely to suffer.

The global economy will therefore more than cough from the virus outbreak… but the size of the impact will depend on the length of the outbreak. 

Analyst: Florence Thiéry – f.thiery@credendo.com