Coronavirus & the weight of China in the Global Economy
The coronavirus (Covid-19) has unfortunately turned into a major global public health emergency bringing tragedy to many lives in many countries. Beyond the tragedy, it also hits families and companies worldwide in a very different way: eliminating demand.
In this article, the TOP 5 reasons behind the general weak demand are analyzed throughout free data in order to better understand the interconnection of the global economy where China remains the engine as factory of the world. These reasons might contract not just the Chinese economy but also the global economy which dependency on the Chinese industry is more than ever a fact. This is then a global issue and needs a global response.
1) TRANSPORTATION INDUSTRY DEMAND DROPS
AIR: The ban, from China to the US, many countries have banned traveling despite the increasing pressure on the economy and the start of the university year. As a result, IATA expects global demand for air travel to fall by 4.7% in 2020, the first overall decline since the global financial crisis in 2008-09 and The Guardian reports that information too. According to IATA, “passenger volumes declined sharply following the closure of Wuhan Airport and the World Health Organization’s declaration of the coronavirus as an international public health emergency.”
MARITIME: According to IEA and RIVERA, the "Large tanker tonne-mile demand into Chinese ports has dropped to virtually zero from a 2019 average of 3.42Bn tonne miles per day, reports VesselsValue (see graphic)."
2) OIL DEMAND FOLLOWS
For many years, the raison d'etre of a refinery was to produce fuels from oil barrels (although it is slowly switching to chemicals). Without fuel demand, there is no need for its row material (oil). Although the SARS epidemic of 2003 is widely used as a reference point to assess the impact of coronavirus, China has changed a lot today. According to IEA, In 2003, China’s oil demand was 5.7 mb/d and by 2019 it had more than doubled to 13.7 mb/d (14% of the global total). Just, last year China accounted for over 75% of global oil demand growth. China’s economy today accounts for 16% of world economic output and it is the largest crude oil importer of the world with 10.1 Mbpd imports in 2019. To compensate for the market drop and correlate with SARS experience, some sources forecast a rebound on demand somewhere around 20Q3 or 20Q4. Although fuel demand drops, Naphtha (used for petrochemicals) remains stable to grow:
We do not know yet the impact on the shortcut of oil demand, but the three different sources interviewed agree that the outbreak somewhere around 400.000 b/d and 500.000 b/d. (Wood Mackenzie, PLATTS, UBS, cut its 2020 global oil demand forecast, IEA)
3) SUPPLY CHAIN FORCES PETROCHEMICALS TO SLOW DOWN
Petrochemicals are everywhere. If we analyze the drop in general consumption and workforce limitation, several industries will be most probably impacted: textile (when you buy clothes in Zara or H&M), healthcare (that great bypass of grandpa made of polytetrafluoroethylene), cosmetics (the amazing lipstick from CHANEL), plastics (from your iPhone) or fertilizers (from the fruits you eat).
To help on manufacturing these products, the Chemical Asian Industry relies on Naphtha as row material -used in Steam Crackers- in a complex supply chain that can be summarized as per picture attached.
According to Kelly Cui from Wood Mackenzie, restrictions in transportation and workforce limitation will have a short term impact along the petrochemical supply chain (I would also add consumption): "The duration and severity of the outbreak remain to be seen. Transport restrictions are the main limit on the pace of recovery – once lifted, plants can gradually resume normal production and outflow". Restrictions are expected to be lifted somewhere around March, when the market will pull up and start recovering from 20Q2.
4) PRESSURE ON COMPANIES: BANKS FORCED TO RESPOND
Millions of Chinese firms may collapse if banks don’t act fast. That is the opening tittle in the latest Bloomberg Article. And continues "The virus has put millions of small businesses and families at risk. With much of China’s economy still idle as authorities try to contain an epidemic that has infected more than 75,000 people, millions of companies across the country are in a race against the clock to stay afloat." IS well known in economics, that a company cannot survive many weeks without selling.
5) START-UPS SCRAMBLE FOR CASH
According to South China Morning Post, "Chinese start-ups may scramble for cash as venture capital investments freeze amid coronavirus outbreak". Venture capitalists are advising start-ups to go into “hibernation” mode in order to avoid collapse or bankruptcy. As the Chinese economy is expected to continue slowing, fewer VC deal opportunities may appear in 2020, reducing even from 2019 the opportunity for great Chinese companies to succeed. “There will be fewer investment opportunities this year, and fewer new funds will be able to complete their fundraising,” said Wayne Shiong, a partner at the venture capital firm China Growth Capital.
MBA ENG Alberto Herrera Estarriaga
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