Coronavirus fears have usurped US-China Phase One trade-deal positives for the global economy, at least in the short term. Novel Coronavirus (nCoV) is expected to hit an already shaky Chinese economy. And with it, the global economies too.
Already, the impact of the nCoV is being felt in India’s textile industry. Textile traders from India have cancelled their trips to China, and vice versa. A number of textile clusters in the country employ Chinese machines that are serviced by Chinese engineers. These engineers are no longer travelling to India due to the travel advisories issued by various countries. For instance, Panipat cluster has around 25-30 Chinese engineers and salesmen visiting the cluster daily. That has stopped for the last 15-20 days. A similar situation exists in other parts of the country too. Moreover, leading European machinery makers have shifted production facilities to China, from where they service the Asian market.
The industry fears that there could be a problem of sourcing spare parts for machines, if the nCoV scare continues.
India’s textile imports from China
The Indian textile manufacturing industry has been concerned about the rising textile – raw material and apparel – imports from China. At least in the short term, these imports would be curbed.
While Indian apparel retailers may be relieved, apparel exporters will have to find other sources for fabrics which they were importing mainly from China.
Crude prices fall 8% in a fortnight
The nCoV has led to a sharp fall of 8% in crude prices over the last fortnight. This will spill over to the polyester fibre and yarn prices. However, the polyester market is inflicted with low demand at present. And China is already saddled with stocks. This could extend the bearish sentiments in the polyester sector beyond February (when the Chinese New Year holidays end) and moving into April, or beyond.
Cotton prices remain subdued
Global cotton prices are falling. This was expected around this time of year when Chinese markets shut down. However, the nCoV will keep the markets down for much longer as traders from cotton-growing countries will be reluctant to deal with China, and other affected countries including Vietnam, for some time. For Indian mills, this would mean sufficient availability of good quality cotton at low prices.
Shipping costs could fall
China accounts for a sizeable share of world trade. A forced decline in Chinese production, exports and imports will result in lower demand for logistics and freight capacities and thus a fall in costs.
International buyers will continue to source from countries other than China
US buyers and consumers had paid higher prices for apparel in 2019, due to tariff restrictions on China. At the same time, buyers and brands have established a more diverse supply chain that is not as dependent on China.
This comes in handy again when US will need to continue to source from other destinations including India, Bangladesh, Turkey, and from countries nearer home. This holds true for Europe too.
Moreover, with lower input and textile prices, and shipping costs, apparel prices will hopefully come down to some extent.
Demand for medical disposable gear on the rise
Demand for face masks, gloves, disposable medical overalls, will increase significantly worldwide, in turn stimulating demand for other chemical markets.
China’s economy is the source of roughly one-third of world economic growth. S&P Global Ratings said last week that the coronavirus could knock 1.2 percentage points off China’s growth rate. Thus, a slowdown could be felt widely.
While it remains early to assess the lasting impact of the outbreak, markets worldwide have been reacting, with the Indian Stock Exchange closing 1% lower on Monday, January 27, on fears of the virus spreading. UK’s FTSE witnessed stocks crashing more than 2% on the same day.
Shares across Europe too saw big declines, with the German Dax and French Cac 40 indexes both down by more than 2.5%. Luxury brands popular in China, including LVMH, Kering, L’Oreal and Hermes, all took hits, after seeing record high share prices in the past month.
In London, clothes maker Burberry, which makes about 16% of its sales in China, fell 4.79%. China is one of Burberry’s fastest-growing markets, and has warned investors that a drop in Chinese spending could spell a decline in its own revenues.
Other retailers in China – H&M, Ikea – to name just two, have closed down stores in the Wuhan region. H&M has shut down 13 stores, while Ikea has temporarily closed its store which employs 500 people.
The coronavirus outbreak comes “at probably the worst time for China,” said Jude Blanchette, head of China studies at the Center for Strategic and International Studies in Washington. The Lunar New Year “is the single biggest economic event in China where last year there was upwards of US$ 150 billion spent during the period, so the economic implications could be significant,” he said.
The Wuhan coronavirus outbreak is already spurring people to hunker down and avoid going outside. That kind of behaviour could deal a huge blow to the service sector, which now accounts for about 52% of the Chinese economy.
In the early 2000s, consumer spending on average drove between 40% and 50% of Chinese growth. Now it drives about 60%. Travel is also far more important now than it was to the much poorer, industry-heavy China of 2003. Tourism and related sectors now account for about 5% of China’s economy, notes Commerzbank, up from 2% in 2003.
The shock is hitting just as China contends with its slowest pace of economic growth in decades, reviving fears that its reduced appetite for the goods and services of the world could jeopardise jobs on multiple shores.
Travel advisories curbing travel and business
Many countries have imposed travel bans to China, including US, Canada, Australia, some European countries, India, and others.
Mongolia has closed its border with China and shut down all educational institutions. Philippines has stopped issuing visa on arrival to Chinese tourists. Hong Kong has cut down transportation to China. More Asian countries are expected to enforce travel bans in the next few days.
According to a report by Dezan Shira Associates, “We have specific concerns about the relative lack of precautions and monitoring in Thailand and Vietnam. India also looks problematic, and we expect cases to rise sharply in these countries. Businesses in these countries also need to start looking at preparing contingency plans and facing travel restrictions. We do not expect any return to normality for businesses in China during this month and probably through until late March. This means steps need to be taken to remotely manage and administer your China business with minimal or no office staff in situ.”