Be prepared for the indirect consequences of COVID-19

The COVID-19 coronavirus has become the dominant global news story and the prime driver of financial markets’ sentiment, volatility and direction. Only recently, have some of the short and long term effects been examined. I’m writing about some of the potentially dire consequences yet to be mentioned in mainstream media.

For some time, media have been reporting the number of people in China in isolation (quarantine) by official order. People stuck indoors are unable to turn up to work or go out and spend. Factories in China are running at well below capacity, if at all. There is also a shortage of truck drivers, port workers and officials to process both exports out of and imports into China. All of this adds up to a threat to key global supply chains, manufacturing capacity and household consumption.

Not only is China the world’s most populous and number one export nation but it also supplies key components and ingredients to manufacturers around the world. Key food imports have become stuck at Chinese ports (e.g. US and European pork, US and South American poultry and Argentinian beef) or held back at the country of export (e.g. New Zealand and Australia crayfish). Other imported goods are also stuck in Chinese ports, e.g. logs. Exports from China are also stuck at Chinese ports and warehouses.

Prices of beef, coffee, corn, crayfish, logs/timber and dairy products have fallen since the outbreak of COVID-19, more so recently, as producers seek alternative markets or simply want to dispose of surplus inventory.

Car manufacturers, from South Korea to Europe and the UK, are reporting two to four weeks inventory of Chinese supplied components and parts that are essential for vehicle assembly. Sellers of electronic consumables in Asia, Europe and the US are warning about low inventory levels of key components. Shipping companies are experiencing a sharp drop in traffic and demand. Construction companies in New Zealand and Australia are warning about an inability to source building materials from China.

Worryingly, China is the world’s leading supplier of active pharmaceutical ingredients (API) used in the manufacture of pharmaceuticals. India, the world’s number one pharmaceutical manufacturer, sources more than 70% of its APIs from China, which together with China’s pharmaceutical exports means that China’s APIs feed into almost 45% of the world manufactured medicines.

More than 10 years ago, the then (and still current) Chairman of India’s Cipla, one the the world’s leading producers of APIs and generic pharmaceuticals warned that “if tomorrow China stopped supplying pharmaceutical ingredients, the worldwide pharmaceutical industry would collapse.” If anything, the pharmaceutical industry’s reliance on China has increased substantially since that warning was uttered.

The COVID-19 coronavirus, in itself, may or may not be as deadly as the SARS coronavirus but, in the 17 years since the SARS outbreak, China has become a global economic powerhouse, a key player in the global supply chain and a significant consumer. Not only has the world become a much more connected place, both personally and virtually, but it is also highly dependent on China for many essential products and trade. This gives the human response to COVID-19, rather than the virus itself, the potential to produce the greater global harm.

We can do without the latest car, phone, computer or television but, consider the potential life threatening implications of a shortage of antibiotics, anti depressants and pain killers.

Almost all of that human response is outside our control but it is up to us to assess and manage COVID-19’s risks to the personal, family and business aspects of our lives.


One thought on “Be prepared for the indirect consequences of COVID-19

  1. Reblogged this on Look Up At The Sky and commented:
    This makes for alarming reading and should be ringing warning bells, even if you don’t want to read or hear anymore about the corona virus. Who has even thought of these consequences? I hope like heck that Pharmac has a risk management plan ….
    Peter has struck out on his own as an independent treasury advisor, and is managing director of his company ITAL. This is from his web site “The economic butterfly effect”

    Like

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