Impact of coronavirus looms large over global markets

LONDON (ICIS)–The typical slowdown on markets at the time of the Lunar New Year has been exacerbated by the spread of the coronavirus in China.

The Lunar New Year usually impedes transactions as festivities are prioritised over business, but this year holidays have been extended to try and contain the virus.

The Year of the Rat is traditionally deemed unlucky, with misfortune striking ahead of China’s new year celebrations.

The new year already appears to be reflecting rodential characteristic in carrying the disease to almost 3,000 cases – 44 as yet non-fatal cases outside of China – with 81 deaths at the time of writing.

This has led to the effective quarantine of the city of Wuhan, the site of the outbreak, and a government-imposed ban on business returning to work in Shanghai until 10 February.

The uncertainty of this has forced the US-China trade war – which largely dominated global trade sentiment last year – to take a backseat in terms of priorities for the global economy.

While it remains early to assess the lasting impact of the outbreak, markets have already started reacting, with the Indian Stock Exchange closing 1% lower on Monday on fears of the virus spreading.

Such fears have been mirrored on the UK’s FTSE, with stocks crashing more than 2% since markets open on Monday.

The impact of this has sent crude levels on a downward trajectory on the back of concerns that demand will be sent spiralling.

SARS TOOK A TOLL
This has led to comparisons being drawn between this incident and the SARS outbreak in 2003, which eroded prices by 20% after more than 8,000 people contracted the virus.

While the downstream petrochemicals market is slower to respond than highly reactive crude values, the further-reaching impact of the coronavirus has not gone unnoticed.

Although 2020 marks the change in International Marine Organization (IMO) fuel regulations, limitations on shipments to minimise the risk of spreading the illness could also impact trade flows.

“[Change in regulation is] still ongoing but we are definitely looking for [shipments] reductions while suppliers are trying to hold firm, [it will be] be interesting with Asian virus if it will affect shipments at some point,” said a European petrochemicals source.

This is not guaranteed to hamper markets in the long-term, with the most pronounced effect expected to dent consumption in retail and tourism segments, and both consumer and public demand for petrol for public transportation and air travel.

“The increase in car ownership and number of Chinese travellers in recent years means that the impact on petrol demand could be sizeable, but temporary, likely in Q1 and early Q2,” said Oxford Economics senior Asia economist Tommy Wu.

“However, this doesn’t necessarily mean that the demand for crude oil will be reduced significantly because Chinese oil companies can continue to import for storage/ build up reserves, especially as the impact from the coronavirus outbreak is likely temporary.

“And since we don’t expect a major disruption in industrial production in general, the demand for downstream chemicals could be limited.”

The regional impact has led to Shanghai Disneyland locking the gates to its local magic kingdom, Starbucks announcing the closure of all stores in Hubei province and branches of Marriott, Hilton Worldwide and Hyatt Hotels groups waiving cancellation fees.

As Wuhan is home to a national technology development zone, industries including optical electronics, telecommunications and equipment manufacturing could be impacted by production slowdowns.

DOWNSTREAM SECTORS TO BENEFIT
In contrast, as demand for hygiene products increases, this could stimulate demand for other chemical markets.

Products like surgical face masks, hand sanitisers and rubber gloves could increase as efforts to limit the spread of infection.

A rise in demand for face masks would lend support to acetic acid – as derivative material cellulose acetate is used in production – or for nonwoven polymers or paper and the compounders and formulators using involved in the alternative manufacturing process.

Rubber and vinyl-based products may also see demand supported by increased sales of disposable gloves.

Soaps and hand sanitisers could boost ethanol sales as it is commonly used as the active ingredient in these products, while thickening agents for these solutions and surfactants are also likely to record higher demand.

Despite the labyrinthine possibilities, the CEO at investment bank deVere Group, Nigel Green, urged investors against knee-jerk reactions in the short-term and to retain diverse portfolios.

“Most investors should monitor the situation with their financial adviser and sit tight at present. But if it is still escalating next week, with much higher casualty rates, a more defensive approach might be necessary,” said Green.

“However, the cost and effort of making such a switch means you do not do it lightly, and more evidence is needed that the virus does pose a medium to long term risk to China and the global economy.”

Front page picture: A man wears a mask while walking through the empty streets of Beijing on Monday
Source: Wu Hong/EPA-EFE/Shutterstock

Focus article by Morgan Condon

Additional reporting by Nick Cleeve, Nigel Davis, Vicky Ellis, Peter Gerrard, Al Greenwood, Melissa Hurley, Richard Price, Katherine Sale, Deepika Thapliyal, and Nel Weddle

Recasts paragraph 10 to clarify impact of SARS on oil prices