Commentary on Political Economy

Wednesday 5 February 2020

YOU HAVE BEEN WARNED!

Coronavirus slowdown starts to bite the world’s industries

Chinese-made electronic components are used widely around the world. Picture: Reuters
Chinese-made electronic components are used widely around the world. Picture: Reuters
Never before in our history have global sharemarkets taken such an incredible gamble on the ability of our scientists, aided by artificial intelligence, to halt a rapidly spreading disease.
And the markets gamble is being fanned by excess world liquidity, aided by massive injections in China and the boom in the US economy which the market believes is likely to see US President Donald Trump returned for another four years.
In contrast, politicians and government authorities around the globe are taking no such gambles with coronavirus. We are watching, for example, a rapid shutdown of the world’s second largest economy in a desperate bid to try and contain the spread of the virus.
And those Chinese efforts are being matched by drastic action in countries, like Australia, which are closely bound to China. The dangers these political actions present to major industries will be horrific should the current crisis last for months.
Politicians are ignoring these industry dangers and are being driven by medical community warnings that the virus has already mutated into a stronger variation that is able to spread more easily among humans. And its spread across mainland China is so rapid that it is already more contagious than the 1918 Spanish flu pandemic.
But markets this week looked the other way to reports on Sky News of a “significant breakthrough” by scientists at Imperial College London, who claim to have reduced a stage of the development time for a coronavirus vaccine from two to three years to just 14 days.
READ MORE:Wine tipped for China virus hit|Cathay Pacific asks staff to take unpaid leave due to virus|Gas alarm amid threat to China exports
The College starts testing on animals as early as next week. A report out of China claimed that researchers had found two separate drugs that can inhibit the effect of the new strain of the coronavirus.
Real world impact
While markets celebrated with more rises – including a small recovery in the oil price – on the ground it’s a totally a different story.
Here are a few of the crisis points:
• Australian gas exporters — many are highly borrowed – face a big potential hit because China’s biggest LNG buyers are considering emergency force majeure declarations as the coronavirus slashes demand. Australia’s LNG export industry, supplied 46 per cent of Chinese LNG in the 2019 financial year.
• The Queensland gas crisis also illustrates the problem for global shipping. The 14-day quarantine on Australian vessels that leave China after February 1 could cause delays and bottlenecks at the LNG port of Gladstone, which typically receives ships every few days.
Similarly, tankers travelling to China will hit problems when they attempt to travel to other international destinations.
• American oil and natural gas producers have been suffering from low commodity prices for the past year and now expect a further sharp drop in revenue. As a result, they are preparing to slash investments in exploration and production.
Daily Chinese oil demand is already down 20 per cent because of dwindling air travel, road transportation and manufacturing. Since China consumes 13 of every 100 barrels of oil the world produces, every oil company is being hit.
• A key Australian export industry, tertiary education, has been jeopardised by an overzealous Australian Border Force, which detained Chinese students, cancelled valid student visas and sent some students back to China. The Chinese government was furious at their citizens’ treatment.
China is Australia’s largest source of international students, which spent $12.1bn on education services in Australia last year. More than 100,000 Chinese students who are enrolled for courses in Australian tertiary education this year are still overseas. Most are likely to be stranded in China by the travel ban.
The coronavirus outbreak has had a significant effect on global travel and tourism. Picture: Getty Images
The coronavirus outbreak has had a significant effect on global travel and tourism. Picture: Getty Images
• Across the globe, many cities are starting to experience the fallout from the big drop of visitors from China now that the Chinese government has imposed a ban on organised tours and many airlines have suspended service to and from China. Australia will be hit hard.
In London, restaurant operators in the city’s Chinatown have noticed a steep drop in business as the global tourism industry reels.
• There is huge disruption in the airline industry. Cathay Pacific has announced steep cuts to China flights and plans to pare back across its network and American Airlines suspended all flights to Hong Kong from Dallas-Fort Worth and Los Angeles. And the curtailment list goes on.
• The world’s gambling capital Macau will shut its 41 casinos for half a month. It’s like closing the Las Vegas Strip, six times over.
• Key Apple suppliers are bracing for severe labour shortages as travel restrictions are expected to keep tens of thousands of workers stranded in their home towns after the extended Lunar New Year holiday ends on February 10.
• Most tech-related manufacturers in China, including robotic companies and car makers are saying there is no clear sign of when their production will return to normal. General Motors, Ford, Hyundai Nissan and other car companies have temporarily closed factories. Apple and Starbucks have closed stores. If component and material makers resume production later than February 10, it could become a big problem for the whole supply chain because key components, including printed circuit boards, passive components, casings and paper packaging are still mainly made in China.
Many groups are now making plans to lessen their reliance on China. Many will return to the US: exactly what President Trump had hoped to achieve via the trade deal.
The industries being hit cover a big part of world GDP.

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