In today’s newsletter, we talk about the unintended side effects of the Coronavirus and how its impacting industries far and wide.
The Story
If you haven’t heard yet, we detected the first case of Coronavirus in India. So clearly, it’s time to evaluate the crisis once again and try to see what’s transpired since the last time we covered this story.
And we will begin with Airtravel
Now this one is a no brainer. When there’s the fear of a global pandemic, you are unlikely to take to the skies. But the airline industry is very peculiar. It runs on razor-thin margins and any disruption to its usual operations can be catastrophic. Look at the numbers for once. 19 of the 51 listed Asian airlines were unprofitable, according to data compiled by Bloomberg. Only six of the carriers, including top-ranked Spring Airlines Co. in China, had profit margins fatter than 10%. So we are talking about an industry that’s already on the brink of disaster. Any more, and you could push them off the edge rather easily.
Consider for instance Hong Kong’s flagship carrier, Cathay Pacific. This is a company that’s been on the hot seat for a while now, thanks to the pro-democracy protests in Hong Kong. But then you have another problem here. Cathay pacific routinely flies to China. In fact, a bulk of its revenue comes from flights originating in and out of of the country. With the Coronavirus now taking centre stage, there’s talk of Cathay Pacific having to cut its capacity by half. A sustained disruption in its operations could truly jeopardise the airline’ s future.
Bottom line, the industry is being hit hard.
Then, there are Surgical Masks
On Wednesday, a drug store in Beijing was fined 3 million yuan ($434,530) for hiking the price of face masks by almost six times the online price amid the Coronavirus outbreak. But this story tells us something more. The drug store upped its price not because it was fancying a price hike. It increased its price thanks to a surge in demand facilitated by the fact that the country is running out of protective face masks. Now if you are not already aware, we don’t yet have a vaccine for this new virus. What we do have is a preventive care procedure. And most people seem to believe that face masks offer that extra bit of protection the virus demands. And that little thesis has turned the fortune of a select few companies.
For instance, shares of Japan’s Kawamoto Corp., which produces masks and other medical products, has quadrupled since the start of the year. So despite all the doom and gloom surrounding the situation, a few of us are actually doing better.
A strange feeling that.
Commodities
China is now one of the largest producers and consumers of a wide range of commodities, including oil, steel, copper, corn, wheat and soybean. But considering the country is now in lockdown, there isn’t a whole lot of activity going on here. When workers don’t go back to work, you have to leave the smelters and the refineries as is. Productivity suffers, output declines and supply industries are hit hard. Countries dependant on China for commodities also take a hit.
To top it all off, there is the oil concern. China is one of the biggest consumers of oil. If the economic engine stalls, oil prices will tank in tandem. Right now, it’s the Lunar New Year in China. Typically, it’s a time of celebrations across the country and beyond. So obviously, the country witnesses a lot of travellers. Last year over the 40-day festival, there were 3 billion trips recorded. This year, however, analysts expect a 30–50 per cent drop in total travel. And with the travel industry taking a hit, you can see how we could also see a sustained drop in the demand for oil.
And the middle eastern countries will not accept this eventuality. So there’s also talks about the OPEC, wanting to initiate more production cuts to keep prices stable.
In any case, the virus is leaving its mark in places you would not normally anticipate. And as the disease spreads to more countries, one cannot help but think — “Where will it strike next?”
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