Australian exporters heavily dependent on China are braced for the full impact of the coronavirus on Australian exports, from iron ore and LNG, to lobster and lamb, and bionic ear technology.
The global death toll from the virus outbreak has passed 1,000, and more than 40,000 people have been infected, 99% of those in mainland China. Vast swathes of China’s massive economy remain in lockdown.
While China’s senior medical adviser Zhong Nanshan has forecast that the outbreak may have peaked and could be over by April, the director of the World Health Organisation said a vaccine could be 18 months away, and warned of the potential economic and social consequences if the virus outbreak is not brought under control.
“To be honest, a virus is more powerful in creating political, economic and social upheaval than any terrorist attack,” WHO director Tedros Adhanom Ghebreyesus said.
There are concerns Chinese importers of copper and gas could use force majeure clauses in their contracts that will allow them to suspend deliveries of the key commodities.
Force majeure clauses refer to unforeseeable external circumstances that prevent a party from fulfilling a contract, usually dramatic events such as natural disasters, strikes or terrorist attacks.
China and Australia are intensely interdependent on liquefied natural gas (LNG). Australia supplies about 40% of China’s LNG, while about 40% of Australia’s LNG exports are to China.
China’s largest importer of LNG, China National Offshore Oil Corporation (CNOOC), reportedly invoked force majeure to suspend contracts with Total and Shell last week, but the claim was dismissed by the suppliers. Shell’s Queensland Curtis LNG project is CNOOC’s biggest Australian supplier.
The price of Australia’s most important export to China, iron ore, fell 11% in January due to the virus outbreak, ratings agency Moody’s said.
Australia exports more than $60bn a year worth of iron ore to China, and the industry is a major source of tax revenue. A fall in volumes and price will hurt Australia’s budget bottom line.
According to Moody’s, mining magnate Andrew “Twiggy” Forrest’s Fortescue Metals is the Australianmining company most exposed to a downturn in China: making 93% of its sales there.
But the two big Anglo-Australian miners, BHP and Rio Tinto, are also heavily exposed, selling 55% and 45% respectively to China.
NAB’s Forward View said commodity prices remain in retreat in response to the coronavirus, and warned “the scale and duration of the outbreak is highly uncertain”.
“Markets are concerned that containment measures implemented by Chinese authorities will negatively impact demand for commodities from the manufacturing and construction sectors – placing downward pressure on prices.”
Ben Jarman, senior economist at JP Morgan, said growth forecasts for China had been significantly downgraded as a result of the coronavirus and continuing uncertainty over its impacts.
“The forecast short-run hit to industry in China is very large, and it may be difficult for affected users of raw commodity inputs to ‘look through’ to the other side of the shock.”
Reports that force majeure may be declared on some of China’s LNG imports, suggest “a quite persistent shock to demand”.
Australia’s largest meat-processing cooperative, Northern Cooperative Meat Company, has had product stuck at Chinese ports awaiting dock workers to return to work, while China’s ban on seafood imports has left Australian producers with millions of dollars worth of unsold fish and shellfish.
Economists at UBS say Australia’s economy will shrink by 0.1% this quarter thanks to the coronavirus outbreak, and have warned that it could be even worse.
This is UBS’s weakest forecast for Australia since the global financial crisis and warn that the recessionary impact could even be as great as a 0.5% contraction.
The calculations are based on an expectation of a 30% slump in China’s total outbound travel in 2020, with the first quarter contraction the most severe. Millions of Chinese tourists visit Australia every year and are the biggest spenders when they get there.
“This wipes A$6bn from GDP, or 0.9% off annual growth, a plausible downside risk scenario ... we now think Q1 GDP growth is likely to be negative, even with arguably still optimistic assumptions,” UBS analysts said in a note.
Australia’s shipping routes have not yet been particularly affected by the government’s travel restrictions, according to the CEO of Ports Australia, Mike Gallacher.
He said both maritime imports and exports were continuing as usual.
The government’s travel ban, announced on 1 February, requires any person who passes through mainland China to spend at least 14 days outside of China before entering Australia. But many cargo ships from China to Australia already take 13 or 14 days to arrive, creating only negligible delays.
“We can fortunately say there have been no reported major disturbances to the supply chain,” Gallacher told Guardian Australia.
“As an island nation with 98% of its trade coming through our ports, imports and exports must and will continue with the addition of extra safety measures.”
Australian and New Zealand firms heavily exposed to China are also demonstrating support for the country by sending significant donations to help fight the virus.
The a2 Milk Company has donated NZ$1m ($961,100) to two universities working to develop a vaccine for the coronavirus, as well as more than $2m ($1.9m) in cash and milk products to the Chinese Red Cross.
“We believe that in addition to providing support on the ground for Chinese families through product donations and financial support for the local Red Cross, the most effective way for us to assist the Chinese people and the global community is to provide funds that will help independent scientific researchers develop an effective vaccine for this virus,” managing director Geoff Babidge said.
Rio Tinto and Fortescue have also donated $1m each to Chinese NGOs and charities to help the country fight the coronavirus outbreak.
Australian hearing implant maker Cochlear Ltd cut its full-year profit forecast on Tuesday, blaming the coronavirus outbreak as hospitals in China delayed surgeries to limit further spreading of the infection.
Hospitals across China, Hong Kong and Taiwan have been deferring surgeries, including cochlear implants, as part of a host of measures to stem the spread of the virus and prevent panic.
“It has become clear that the coronavirus will impact the number of cochlear implant surgeries in Greater China, a top-five market for Cochlear,” Cochlear chief executive Dig Howitt said in a statement.