Weakest link: Global supply chains disrupted by coronavirus

Closure of Chinese businesses and ports to curb spread of the virus is likely to hurt economies and companies worldwide.

COSCO ship
Many global firms are vulnerable to any disruption in supply and demand from China, the largest trading partner for most large economies [File: Rodrigo Garrido/Daylife]

Business activity is slowly sputtering back to life in China but the extended Lunar New Year holiday – originally scheduled for January 24-30 – has affected companies around the world as the Chinese government enforces curbs to prevent the spread of a deadly coronavirus.

Closed-off ports and delayed shipments from China are not only affecting Chinese workers and companies but also their trading partners overseas who depend on supplies to keep business running.

Stephen Wong, a Malaysian who imports tech components from China for a business producing locally branded computers on the outskirts of Kuala Lumpur, told Al Jazeera that most of his products are stuck in Shenzhen in southern China as workers there have been instructed to stay at home.

“Without inventory on hand, we expect to lose 70-80 percent of sales,” said Wong.

Globally, Malaysia was the eighth-largest importer of Chinese goods and services in 2018, according to World Bank figures.

But companies in countries such as South Korea, Japan and the United States could suffer the most due to disrupted supplies of components and finished goods from China.

As the fallout of the coronavirus continues to affect the operations of multinational companies, these firms are likely to turn to other manufacturing hubs worldwide, Rajiv Biswas, Asia Pacific chief economist at IHS Markit, told Al Jazeera.

“For many global multinationals, the severe disruption of China’s industrial output has highlighted the vulnerability of their global supply chains to excessive reliance on China,” he said.

Other global manufacturing hubs in Asia and Latin America are likely to benefit as firms turn away from China to cope with demand, said Biswas.

“The experience of the coronavirus epidemic will likely further accelerate efforts over the medium term by global firms to diversify their supply chains to other manufacturing hubs in Southeast and South Asia, including Vietnam, Thailand, Indonesia and India, as well as to other major emerging markets manufacturing hubs, notably Brazil and Mexico.”

But many countries could also suffer due to the closures in China because their exports to the country are also being disrupted. In fact, most countries today rely on China to consume the majority of their goods.

Some industries have it worse than others. In a blow to some global commodity suppliers, some Chinese companies have reportedly used force majeure clauses in contracts to delay or cancel purchases of goods including liquefied natural gas (LNG) and copper.

A force majeure is a legal provision that exempts companies from meeting contractual obligations because of events beyond their control.

French oil giant Total said on Friday that it rejected a force majeure request from a Chinese LNG buyer, the first global firm to push back against the use of the clause.

“Some Chinese customers, at least one, are trying to use the coronavirus to say I have force majeure,” Philippe Sauquet, head of Total’s gas, renewables and power segment, said on Thursday. “We have received one force majeure that we have rejected.”

A copper smelter in China has also declared force majeure, sources told Reuters.

China is the world’s largest importer of copper and iron ores, accounting for approximately 50 percent of world demand for copper in 2019, according to World Bank data.

In Chile, one of the world’s largest producers of mined copper, Chinese buyers have asked miners to delay shipments due to port shutdowns.

While the suppliers have not reported any contract breaches, they have verbally agreed with clients to reschedule some deliveries, according to Victor Garay, market coordinator for Cochilco, the copper commission in Chile – the world’s biggest miner of the metal.

Chile and Peru are the most significant producers of mined copper, with Chile accounting for 27 percent of all copper mined globally.

Meanwhile, trade in iron ore could be affected in the medium term as the coronavirus prompts a long delay in construction activities, according to economists at ING.

Manufacturers with significant operations in China, such as phone maker Apple Inc and large global carmakers, are also warning of a decline in output and profits due to the extended closure of factories.

Hyundai has halted production in South Korea because of a lack of parts from China and Tesla has warned that it would see a delay of more than one week in the ramp-up of production on its Shanghai-built Model 3 cars.

Economists with government-backed think-tanks in China are already forecasting a loss of at least 1 percent in economic growth due to the virus outbreak. Based on estimates by ING, the effects could travel beyond global supply chains to hurt several economies, especially those in Asia.

ING China economic impact
The largest economies in the Asia Pacific region would be affected by a slowdown in China’s economic growth [Source: ING]
Source: Al Jazeera