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COVID-19 halts production, stalls distribution and freezes services

By Geoff Iyatse
08 March 2020   |   3:24 am
Last week, the Chinese government stepped measures to prevent the highly contagious Corona Virus Disease 2019 (COVID-19) being imported into the country. Multiple cities, including Beijing, Shanghai, and Guangdong

Severe Oil Market Shock Predicted

Last week, the Chinese government stepped measures to prevent the highly contagious Corona Virus Disease 2019 (COVID-19) being imported into the country. Multiple cities, including Beijing, Shanghai, and Guangdong, have announced a 14-quarantine for travellers arriving from other countries with severe outbreaks, such as Italy, Iran and South Korea. 

The audacity of the Chinese government may appear strange, yet it reveals the underbelly of the flu that has taken the world by the storm. And its fear is real. Spread in the Asian giant is slowing down while the speed spreads like Harmattan elsewhere. Indeed, as of Tuesday, 75 China inbound travellers tested positive of the virus.        

That China – the epicentre of the deadly disease – could think of profiling the statuses of those who come into its shores speaks volumes of the global vulnerability of the disease. The number of infected persons and the speed of spread remain continues to rise amid growing uncertainty among nations.

Already, the Chinese production machine, which America, Europe, Africa and, indeed, the entire world rely on for survival, is gridding to a halt. China has not only cut down its production but has also started buying back the same medics such as protective materials and other essential items it exported a few months. The impact of a ‘sterile’ China would be better appreciated in the coming weeks as the world runs out of inventory.      

Around the world, people are avoiding crowded places, staying away from offices/factories, suspending production, deferring crucial economic meetings and cancelling holiday plans to protect themselves against the air-borne infection. Each of these activities has a huge negative economic impact. The combined effects of the preventive measures could with their multiplier effects be upsetting.

As the panic, both real and imagined halts production, stalls distribution and freezes services across the world, the impacts of a protracted Coronavirus flu could plunge the global economy into a recession, experts have warned. Even the International Monetary Fund (IMF), World Bank and the Organisation for Economic Co-operation and Development (OECD), who have downgraded growth forecasts for the year predicted a grimier future should the outbreak continue in the fashion the world has witnessed in the past two weeks. 

OECD, for instance, has downgraded its November 2019 growth forecast from 2.9 percent to 2.6 percent but with a caveat. If the virus spread is not contained with the similar speed it is spreading, the organisation says the growth forecast could be halved. 

IMF, which has announced $50b funding to support Coronavirus control, is hesitant in releasing its reversed forecasts for the year, and thus is understandably deliberate. There is yet no clue about the intensity and longevity of the virus that is not only feasting on human blood but also sucking to death the economies of both struggling and stable economies. If there is anything, it is certain that the global economy will grow at a slower rate than the previous year.  

IMF had in January dropped the 2020 world economic growth forecast by 0.4 percent in the heat of the trade tension between the United States and China. Any country that can, by its action or inaction, pull back the global economy by close to half of a percentage is influential by every globally influential and relevant to the growth of other economies. So, the Chinese economy is not just a national economy in the strict sense of the world, it is a determining variable in how the rest economies fair. 

Until it hit by COVID-19, China controlled a third of the global manufacturing, making it the largest exporter of goods. Its share of global gross domestic product (GDP) has grown steadily in the past few decades hitting 19.24 percent (almost one-fifth) last year, and it is projected to beat the United States in no distance future. Alas! Coronavirus is threatening to grind East Asia’s country into powder. And should China, the workshop of the world, fall, the global economy will stumble.     

Thus far, the world is not being afflicted but also groaning under the economic pains that come with the Wahun-originated disease. Gold is an investment buffer (safe haven), individuals with excess liquidity return to in the days of uncertainty. Its current price reflects the intensity of the panic the world is currently grappling with. As global stocks nosedive in response to the fear of Corona, the increasing number of wary investors is throwing proceeds of divested stockholding into the gold market. As of Friday, a price of gold per ounce, which was hovering around $1,100 last year, had hit $1,672.57. Gold investors have regained their seven-year loss between February and date – no thanks to Coronavirus.

CNBC described Friday, February 28, 2020, as a “wild day to end a bad week” for Wall Street. Investors, according to the report, witnessed the fastest market correction known in the history of trading, as the S&P 500 took just six sessions to fall more than 10 percent from a peak. In that week, the U.S. lost $3.18 trillion in market value, compelling an obstinate Donald Trump to speak out on how the government would stimulate confidence to reduce the economic scourge of Coronavirus. Last week, the market continued to a haircut, consolidating the panic in the past few weeks. 

No region is safe – from a fragile Europe to a hitherto stable Asia – investors are dumping stocks for less risky investment options like gold. Coronavirus is the new tsunamis, but unfortunately, nobody sits in front of the television screen to watch it sweep away its victim. Everybody, every country – poor or rich – is a victim of its range. Yes, Africa, and, indeed, Nigeria even with just an index case is a loser.

Before the advent of COVID-19, China’s daily crude import was over eight million barrels, which is close to 60 percent of the total import of entire Europe. The same China is second to India, whose net import is also as high as five million barrels, among the top consumers of Nigeria’s crude. Meanwhile, China’s daily energy need, according to a Bloomberg report, has fallen 20 percent. This implies that China would have to cut its net import by over the same rate to fully utilise its domestic production. 

It thus means that oil exporters, including Nigeria, who rely on China, will have to explore other markets.

Already, exports from Nigeria and Angola are facing a tough challenge. A report mid-last week says about 70 percent of April-loading cargoes from Angola and Nigeria is yet to find buyers, showing a sharp departure from the normal speed of sales. The report notes specifically that most of Nigeria’s April export programme (about 55 cargoes) is unsold, while half of Angola’s planned shipments for next month have yet to find buyers. The implication: the unsold products will be competing against millions of barrels that are scheduled for subsequent months but are yet to be purchased.

In February, the Chinese economy fell to 50 percent capacity. But last week, the Copernicus Atmosphere Monitoring Service data compiled by Windy.Com, showed a rise in the nitrogen levels – an indication that Chinese workers are heading back to factories. The economy is said to have gained an additional 10 percent to 20 percent after the removal of the community lockdown ordered by the authorities. But the issue with China goes beyond the production plants. It manufactures for a world that is wary to go near their ports to lift goods. Except for the current fear abates, when China will be able to regain the market footprints it needs to sustain its production, which remains hazy.  

There was a spike in the cases reported in India, South Korea and Japan mid-last week, triggering the fear that the second-largest country in the world could face a serious outbreak with far-reaching economic consequences. If this happens, India’s oversized energy needs will certainly plummet, with serious implications for Nigeria’s crude export as well.  

The collapse of Organisation of Petroleum Exporting Countries (OPEC) to agree on a cut output at a summit in Vienna on Friday has heightened the fear that Coronavirus may trigger the most severe oil market shock in history. Brent, which Nigeria’s crude is benchmarked, lost 9.44 percent on Friday alone to close at $45.27 per barrel. The price, which could plunge further in the coming weeks in the face of depressing demand, is the lowest since July 2017 and over $11 less than Nigeria’s 2020 budget oil price benchmark. The price shortfall alone, not talking about the unrealistic production target, has created a huge hole in the budget.

The India and Nigeria’s economic tie goes beyond oil. India’s drug export restriction is a practical demonstration of how economies intertwine globally. India, which has carved a niche for itself in the world’s drug market, is holding back the essential community as it runs out of ingredients sourced from China. Now other countries like Nigeria, whose drug markets rely upon it up to 70 percent according to the Director-General of National Agency for Food and Drug Administration and Control, Mojisola Adeyeye, may suffer acute shortage in the coming months. With domestic production capacity near zero and India being the top supplier, the acute drug shortage envisaged by Adeyeye will put a serious strain on household incomes and affect labour supply in the short-run. Both challenges pose threats to the performance of the economy.

The rail modernization project seems to be the first major national project to have been affected by COVID-99. On Friday, the Minister of Transportation, Rotimi Amaechi raised the alarm that the delay in the return of the employees of the China Civil Engineering Construction Corporation (CCECC) who were invited by the Chinese government would affect the delivery deadline of the project. This implies that the project would not be available for its economic use as planned, just as its costs of construction could increase on the account of the delay. Travel and tourism is, perhaps, the most affected industry. The International Air Transport Association (IATA) says airlines could lose as much as $113 billion in revenue to the virus. Local hospitality operators are counting their losses. John Okorie (not real name), ahead of the marketing team of a leading Lagos hotel, says revenues coming from guests on short business trips have fallen by over 50 percent.  

“It may be worse in the next few months except the outbreak is quickly contained,” Okorie noted, adding that, “guests, both from overseas and other parts of the countries are very wary of traveling now. People are not excited about meeting prospects or holding physical meetings. So, cancelled bookings are on the increase.” Okorie says professionals who provide services to holiday seekers are the worst hit as “holidaying is the last thing anybody would want to be bothered with now.

Personal hygiene products have gradually become essential commodities at homes, business premises, hotels, schools, and other public places, creating expenditure items for individuals, businesses and the government with a corresponding revenue line. Governments, at different levels, are already making this a budget item. In doing this, funds set aside for infrastructure and other critical needs will be diverted to combating COVID-19. 

From manufacturing to services, Nigeria, like every other country, will see Coronavirus contracting the economy.  But the strength of the impacts will be a function of the potency of the scourge. And if the country is isolated from the spread of the virus, it will not be detached from its bit on the global economic.