A Closer Look at the Effects of Covid-19
The impact of COVID-19, commonly known as the coronavirus, is palpable. Whether the pandemic is real or exaggerated, as suggested by some, it has created global pandemonium. This aspect will however be dealt with by persons more qualified in the field. This discussion deals with the effects that the coronavirus has had and continues to have on the economy and global supply chain, particularly with regards to manufacturing, transportation, commodities and insurance.
According to latest predictions by Bloomberg, the coronavirus could cost the global economy a staggering 2,7 trillion USD. China, known as ‘the world’s factory’, is the world’s biggest producer of manufactured components. It is of no doubt that world economies and stock markets have suffered major blows due to the disruption of commercial activity. While it is reported by Made-in-China.com, one of the main platforms connecting Chinese suppliers to global buyers, that as of late February 2020, 80% of manufacturing firms in China had resumed operations, it had said that this does not solve the problem as “many factories don’t have enough inventory and supply chain obstacles cap production capacity”.
According to the United Nations Conference on Trade and Development, about 80% of world goods trade by volume is carried by sea and China is home to seven of the world's 10 busiest container ports. A chief shipping analyst at BIMCO, an international shipping association, has said that a closure of the world's manufacturing hub impacts container shipping at large, as it is a vital facilitator of the intra-Asian and global supply chains. This will affect many industries and limit demand for containerised goods transport. Since various items, such as machinery, cars, apparel and other specialised goods are shipped in containers, there is no doubt that disruptions to various industries will continue to be felt around the world.
Some illustrations of this are the suspended production at Hyundai’s South Korea plants because of a disruption to the supply of parts caused by the coronavirus outbreak in China. In addition, production has also been put to a standstill in one of Hyundai’s factories in South Korea as a result of one of its employees contracting the virus. The high-tech industry is also reported to have been affected. Apple currently faces challenges of having a constrained global supply of iPhones and significant drop in demand in Chinese markets. Forbes, as at 7 March 2020, reported that Apple’s major upcoming devices could be delayed by months because of the temporary shutdown of factories in China.
The delay in the production and delivery of seasonal apparel could see clothing retailers across the world being faced with huge losses occasioned by not having the right goods at the right time. In essence, companies which are likely to be most affected are those which rely heavily or solely reliant on factories in China for parts and materials. Since Chinese manufacturing plants has fallen in the past month, the domino effect is that the global supply chain will be affected.
Transportation and Commodities
BIMCO indicated that as of late February many shipyards in China remained closed and declared force majeure in many cases and an estimated 150 vessels are currently under retrofit at Chinese yards. Massive labour shortages have seen the hinderance of transportation of containers by trucks, with large-scale blanking of sailings being on the rise. With wide-scale travel bans being implemented at various airports coupled with cancelled flights and lost sales, the aviation industry is being jolted. The International Air Transport Association reports that a financial impact could see the loss of between 63 billion USD and 113 billion USD in worldwide airline revenues this year.
The Dry bulk commodities sector dealing with commodities such as coal, grain and metals is set to be the most affected given that China’s import demand for these commodities are amongst the highest in the world. BBC News reports that crude oil consumption by China has slumped more than 20% which is a clear symptom of a decrease in business activity. The battery market also faces a crunch as Chinese battery producers face high risk of additional production delays. Consequently, this will impact on the markets for computers, mobile phones and electronic vehicles.
It remains to be seen what disputes may arise between owners, charterers, sub-charters and the like since none of the parties will want to carry the consequences of demurrage and delay. Ultimately such costs might give rise to surcharges or adjustments in freight.
With regard to the insurance market, Insurance Journal reports that while there is a significant risk of disruption, corona-virus related claims will be low. Business interruption claims are reported to be limited as policies commonly exclude outbreaks of infectious disease and pay put only if physical damage occurs. However, some areas where insurers stand to be affected by the virus are health insurance, events insurance, travel insurance and credit insurance. With regards to reinsurance, Insurance Journal is of the view that reinsurers would need the death toll to rise into the hundreds of thousands before they could take a big hit.
From experience, the world’s largest insurers have learned lessons from previous health crises such as the 2003 SARS outbreak, and have tightened up their policies by inserting communicable-disease exclusions to prevent potential losses.
In conclusion, China, as the number one trading partner for many countries in the world, certainly made its mark as to the pivotal role that it occupies in the global economic system. There is no doubt that companies that experienced losses will have a closer look at the provisions in their contracts, in their hopes of finding recourse. China as at 28 February 2020, has already issued over 3,325 force majeure certificates covering contracts worth a combined 38 billion USD. Litigation will also brew amongst companies seeking to enforce claims against each other, as well as insurance companies. However, seeking to enforce cross-border damages claims across different jurisdictions will not be a simple exercise.