Coronavirus & trade: Domino effect of black swan events?
• Novel coronavirus has been declared a pandemic with 118,000 cases and nearly 4,000 deaths as on March 11.
• UNCTAD has estimated a possible decrease by US$ 50 billion in exports across global value chains.
• Indian industry is witnessing export opportunities in sectors like steel, textiles and agri products, but also faces the double whammy of supply chain disruption and weakening market sentiment.
• Given the uncertainties and rising fear across the globe along with myriad possible repercussions on business, the ultimate impact on exports could be much larger than presently estimated.
The World Health Organisation (WHO) has officially declared the novel coronavirus outbreak as a pandemic on March 11, a term given to a disease spreading in multiple countries across the globe at the same time. According to the WHO, there are 118,000 cases globally now, and nearly 4,000 deaths, with Antartica being the only continent still immune to the virus.
Even as China asserts it has passed the peak of the Covid-19 with single digit new cases, countries across the world are resorting to emergency measures, as cases outside the mainland have increased by 13 times in two weeks. POTUS Donald Trump has banned all travel from Europe for a month. Italy had decided to close all shops, except for food stores and pharmacies. Denmark has also closed all schools and universities and sent back public servants on non-critical roles. India has stopped granting visas for most foreigners until April 15.
Even before the pandemic became certain, the outbreak was showing signs of a severe impact on global trade. UNCTAD has estimated that Covid-19 could lead to a decrease of US$ 50 billion in exports across global value chains. This is primarily due to the slowdown of manufacturing in China, which accounts for around 1/3rd of global manufacturing. The manufacturing Purchasing Manager’s Index (PMI) of China recorded a reading of 37.5 in February 2020, the lowest since 2004, and implying an annual reduction in exports of 2%.
EU and US are the top two regions in terms of estimated trade impact, whereas India ranks 13 with an expected fall of US$ 348 million in exports. Sectors expected to take a big hit include precision instruments, machinery, automotive and communication equipment. Consultancy firm HS Markit estimates that the pandemic could slow down global economic growth to 1.7% (from previous forecast of 2.5%), reduce US growth to 1.8% and cause a recession in Europe.
Indian industry – dual blow?
For the industry, it is therefore a double whammy – disruption in the supply chain of essential raw materials/intermediate goods on one end and weak market sentiment on the other. Already, Indian exporters are anticipating a far greater hit than UNCTAD estimates, with a possible US$ 1 billion hit on outward shipments.
Diamond exports witnessed their steepest fall by 41% in February 2020 to reach Rs 9,800 crore, led by a drop in demand from Hong Kong, China and Italy. Similarly, there has been a 10-15% drop in meat exports and fall in global demand for rice, and restrictions on pharma exports by India due to fear of API shortages. On the other hand, the industry faces a severe supply crunch in sectors like automotive, electronic goods, specialty chemicals and pharma (APIs). Players have been compelled to take chartered flights, since global airlines have stopped flying to affected locations.
On the positive side, sectors like steel, agri products, leather, carpets, etc. see prospects of improved demand and the possibility of substituting China. Even the steel sector has seen a rise in prices for the 6th consecutive month, according to a report by Process Plant & Machinery Association of India for February. This is led by strong demand, rise in raw material prices and the non-availability of Chinese steel. With supply gaps, Indian steel makers are bracing for a sharp rise in overseas orders. Already, Indian steel exports have jumped by 40% over the 10 months ending January 2020 to reach 7.2 million tonnes.
Tea is another such sector anticipating an upside, as Sujit Patra, Secretary, India Tea Association, comments, “Tea exports for the new season have not started yet. This time foreign buyers visit Kolkata, gardens for future contracts. This has been stopped for the time being. But this will not affect tea exports as buyers know Indian tea. However, it will be worrying if virus menace continues for a long time.” He views an opportunity for green tea, where a lot of markets are dependent on China, and informs that some enquiries have already come from Morocco.
The Indian apparel sector also sees opportunities to fulfill the demand gap left by countries like China, Cambodia and Taiwan. But there will be a significant impact on buyer sentiment, as Rahul Mehta, MD, Creative Lifestyle Pvt Ltd, comments, “At the moment, the possibility of the impact being extremely severe is very likely. People are in a negative mood and normally you don’t go out and splurge on clothes in such a situation. Most advisories point to avoiding crowded places.” On the supply chain situation, India is relatively secure when it comes to cotton fibre. But he asserts that Indian companies will face disruption in supplies of man-made fibres, accessories and specialized fabrics that come from China and Southeast Asia.
As the fear spreads, the impact on the industry could present itself in many more presently unimaginable ways. Jayesh Rambhia, President, All India Plastic Manufacturers Association and MD, Premsons Plastics, cautions, “Across the sectors, there is uncertainty. Any uncertainty is bad for business. The buyer cannot come in. We cannot go out to promote export. All the meetings have stopped, exhibitions are being postponed. Lots of moulds were coming from China, and a lot of Indian plastic raw material was being exported to China. All that has come to a near standstill.” He also admits that this is a very new thing in our living experience and memory of the last 10-20 years.
Moreover, businesses are reluctant to make major commitments. In Europe, affected countries and affected regions are asking manufacturers to hold production. People are unwilling to commit anything for which they may repent later. In plastics, there are several ingredients of master batches and ink additives, which are coming from China. Without those ingredients, it is doubtful for how long finished goods will be available if this continues.
Similarly, India has put in a standard operating procedure in the case of ships. Any ship, crew or passenger with a history of travel from a Covid-19 affected country since February 1 will not be allowed to enter any Indian port till March 31. For perishable and time sensitive cargoes, this means increased damage charges and blocking of capital. Harsh Shah, Export Manager, Alimento Agro Foods Pvt Ltd. affirms, “All the shipping lines are delaying all the vessels come from the Far East. Shipping lines are facing quarantines and even if you have orders, there is no space available on ships. There is a bidding war going on for vessels and rates have gone up by 70%.”
Manufacturing companies definitely cannot ask people to work from home, whatever the advisory. Besides this, fear could also lead to an exodus of workers back to their hometowns, for instance, which will be debilitating for the manufacturing sector. Suspension of foreign travel means more losses for airlines, tourist operators, hotels, restaurants, taxi operators and retailers alike.
The US$ 2.5 trillion trade show industry has taken a huge beating with a number of shows getting cancelled/postponed, including the Frankfurt’s Light & Building and Milan Furniture Fair. Besides millions of dollars in losses to event organisers, the loss of potential deals in these shows is even more dire, though it cannot be realistically measured.
So while the novel coronavirus is in itself a black swan event (defined as an unpredictable event with extremely severe consequences), it could manifest in many more unpredictable events leading to a domino effect.