ANZ says that if Wuhan – the home town of the virus – continues its lockdown then industrial production and travel will grind to a halt, hurting demand for our top three exports: iron ore, coal and education.
But some economists are urging caution on measuring the estimated cost to the economy.
“Thus far, we remain unconvinced by what is now a heightened level of hyperbole with regards to this risk,” RBC Capital Markets chief economist Tom Porcelli said.
Macquarie University Centre for the Health Economy director Henry Cutler says the flow-on economic effects to Australia will be small if the virus is contained.
“The SARS outbreak in 2003 significantly reduced retail, entertainment and tourism, but the shock was temporary.”
However, he said the local economy could be hit if the Chinese authorities struggled to contain the virus.
“But the virus’s spread and restrictions to human movement would need to go far beyond what is currently being reported in China.”
Here’s how business is being hit.
China’s restaurants and banquet halls are deserted and that spells trouble for Australian exports of high-end food products.
Elders Limited boss Mark Allison said the stay-at-home edicts from Chinese authorities had come at what is usually a time of peak demand associated with Chinese New Year.
“I have multiple photos from multiple cities in China where there is just no one in the street, so everyone is doing what the government told them to do and staying inside,” he said.
Beijing’s decision to extend the holiday period for another week means a delay a reopening Elders’ facilities in China supplying high-end foods.
It could also have consequence for wool prices as textile mills remain closed for longer than expected.
Australia’s biggest lobster exporter has already told hundreds of fishermen to stop catching the usually prized shellfish after widespread banquet and event cancellations.
The move by Geraldton Fishermen’s Co-operative effectively slashed the price of lobster from a high of $105 a kilogram last week to zero.
While the dairy industry is expected to escape the worst of the fallout, seafood and premium beef and lamb exports are expected to be hit hard while China remains in a form of lockdown.
Mr Allison, who a member of the Australia-China Belt and Road Initiative, said his friends in China were staying home and playing mah-jong to pass the time.
“Everything at the top end of the market is shut down. For our small fine foods business it (demand) has just about stopped,” he said.
“In terms of the restaurant and cafe scene, there aren’t even any staff even if people did want to go out.”
Australian agribusiness leaders expect processed grains and other products with a long shelf life to hold up better in the fallout from the virus outbreak.
Qantas took a share price hit on Tuesday, down more than 5 per cent in afternoon trade. In 2003, the airline noted the Iraq War and SARS had “combined to decimate” profitability, while not splitting out the exact impact. It declined to comment.
Flight Centre CEO Graham Turner. Attila Csaszar
But UBS analysts led by Matt Ryan cut earnings per share estimates for Qantas by almost 5 per cent from fiscal year 2021 “to account for an expected decline in travel related to the Australian bushfires and the recent outbreak of the coronavirus in China”.
They said that assuming international travelling declined at half the rate it did during the SARS pandemic, Qantas could face a $200 million hit to profits before tax. If the coronavirus had the same impact as SARS, that cost could lift to $500 million, UBS estimated.
Qantas could take steps such as lowering capacity or incentivising staff to take accumulated leave, the analysts said.
Virgin Australia’s share price lifted slightly on Tuesday, even as it said group bookings had fallen since the ban on Chinese tour groups to overseas destinations.
“However there has been no increase in individuals wishing to cancel or change their itineraries,” a Virgin spokeswoman said.
“We are monitoring the situation closely from both a safety and load factor perspective.”
The airline operates one daily flight between Sydney and Hong Kong, but no flights have been cancelled due to the coronavirus, the spokeswoman said.
Travel agents are also under the pump. Share prices in Webjet, Flight Centre Travel and Corporate Travel Management were all pounded on Tuesday.
Flight Centre chief executive Graham Turner said one area of direct impact would be the company’s Chinese venture, which he described as relatively small and focused on the corporate travel market.
“That’ll only have a small impact,” he told The Australian Financial Review.
The main issue he was watching was for whether Australian and New Zealanders “get nervous about travelling”.
While this possibly could lead to a reluctance to travel anywhere, Mr Turner said “our experience generally [has been] a lot of people will just change their destination”.
It was too early to identify any trends yet, he said.
Flight Centre’s annual results in 2003 noted SARS impacting results, highlighting pain in Eastern Canada and Britain. “It was over fairly quickly,” Mr Turner said on Tuesday.
Corporate Travel declined to comment and attempts to obtain comment from Webjet were unsuccessful.
One other wild card is whether problems spread to the influential Chinese economy and further to global economic health. Corporate Travel’s 2010 prospectus highlighted economic downturns as a key risk to the business “as a result of reduction in corporate and leisure travel”.
But Corporate Travel’s prospectus also noted the total transaction value – the money flowing through from handling cash including for airline tickets – still rose organically during the bird and swine flu pandemics of 2008-09. The company’s focus on business travel “means it has been less susceptible to recent global shocks such as the influenza pandemic”, the prospectus said.
A question mark also hangs over any negative – or positive – impacts on casinos. When Tabcorp owned The Star casino in Sydney in 2003, it noted a hit to private gaming revenue from the impact of SARS and the Iraq War.
A spokesman for The Star Entertainment Group, where international business accounts for 12 per cent of its earnings, said it was monitoring the situation.
“Any significant decline in Chinese visitation would be a concern for the tourism and hospitality industry in the immediate term … China is certainly an important source market for tourists, but other areas of Asia also provide us with substantial numbers of international visitors,” he said.
Comment has been sought from Crown Resorts. In Macau, reports are already emerging of casinos closing temporarily.
Sudhir Kale of Gameplan Consultants said it was too early to determine the impact on Australia. “We really don’t know how long this is going to last, how widespread the impact is going to be,” he said.
But cushioning factors include Australia not drawing a large proportion of big gamblers from the worst-hit areas of China, and the fact that Australia’s reliance on VIP gamblers from China has significantly reduced since the Crown arrests in China in 2017. “It’s dropped off considerably,” Dr Kale said.
Still, if the virus spreads to other regions of China, such as Shanghai and Beijing, it might hurt more as Australia derives more VIP players from those areas, he said. “Then it’s going to be problematic for us,” he said.
Yet a boost could come locally if the virus is contained, with some Chinese perhaps increasing the chance of travelling to Australia, particularly more southern cities, Dr Kale said.
Other tourism icons might see a slowdown depending on the virus’s spread. Village Roadshow, which owns Sea World and Movie World on the Gold Coast, said theme parks were hit by SARS, terrorism and the Iraq War in 2003.
“These events combined to cause a significant decline in international visitors,” Village Roadshow’s annual report said. The company’s cinema exhibition division revenue was also hurt by “SARS in our Asian territories”, the report said.
Comment was being sought from Village Roadshow, while Ardent Leisure, which owns Dreamworld, declined to comment.
Shares in Australia’s biggest wine group, Penfolds owner Treasury Wine Estates, slumped by as much as 5.5 per cent on Tuesday as investors factored in a potential short-term hit to higher-end wine sales from customers in China avoiding restaurants and bars in bigger cities.
The enormous popularity of Penfolds in China has been central to the broader Australian wine industry expanding its annual exports to China to $1.25 billion in the 12 months ending September 30.
Just three years earlier the figure was $630 million. Treasury Wines makes about 41 per cent of its profits from Asia, and UBS analyst Ben Gilbert expects that to rise beyond 50 per cent by 2024.
But first Treasury and the Australian wine industry must navigate through a potential short-term hit, which UBS equity strategists in China warned last week would be a likely negative for on-premise alcohol consumption in China’s cities as usual customers steered clear of restaurants.
They used the SARS outbreak of 2003 as a benchmark. That triggered a big slump for a short time in beer, wine and spirits consumption in China.
Taylors Wines managing director Mitchell Taylor said he was “quite concerned” about the outlook in the short term in China but it was too early to say what the fall-out might be on the industry.
The big four consulting firms are asking partners and staff who have visited the city of Wuhan in China’s Hubei Province to quarantine themselves to prevent the novel strain of the coronavirus from spreading.
PwC partner Helen Fazzino. Josh Robenstone
EY’s Asia Pacific manager partner, Pat Winter, has asked any of firm’s consultants who have visited the city to “quarantine themselves for at least 14 days and monitor their health carefully”.
“Client-related travel into Greater China at this time is still permitted, however we are encouraging staff to reduce non-essential travel and find alternative ways to connect,” Mr Winter said.
“If staff need to travel to the Greater China region, they are directed to follow the advice of local governments and the World Health Organisation before travelling and to exercise the usual measures to prevent illness as outlined on the WHO site.”
PwC Australia is advising partners and staff who have “returned from the Hubei Province or have come in contact with people from these areas to work flexibly from home for 14 days after returning to their home town,” Helen Fazzino, the firm’s managing partner of People and Culture, said.
Ms Fazzino said the guidance was sent out last week to the firm and “reinforced via our staff internal newsletter today [Tuesday]”.
She added the firm does not believe any local partners or staff have travelled to the area or been in contact with anyone from the area.
Deloitte Australia has told partners and staff to defer travel to China as a precautionary measure.
“At this stage, we have told our Australian teams to defer business travel to all parts of China until further notice. Any Australian team members currently working in China are being supported on a case-by-case basis,” Clare Harding, the firm’s Chief Transformation Officer, said.
A KPMG Australia spokeswoman said the firm was “monitoring the situation closely” with any partners or staff returning from China asked to work from home until they have received a clearance from their doctor.
“Our travelling staff are receiving real-time alerts and travel advisory updates via our travel management and advisory system. For staff returning from China, we are asking they follow government advice being issued,” she said.
“If you have recently returned from travel to China, please work from home until you have medical clearance and keep your manager informed.”
Australian banks and financial services providers have famously retreated from their previously bullish ambitions in the Middle Kingdom and Asia more broadly in recent years.
Rising regulation, competition from the burgeoning group of neobanks and a royal commission into misconduct in the sector have kept them somewhat inward-looking, at least compared to the past.
But nonetheless, some big players still have sizeable footprints in China, particularly Macquarie, ANZ and AMP Capital.
Sources at Macquarie – which was an early entrant to the Chinese market more than 20 years ago – said the global investment bank’s 100 employees on the ground in China were currently not working or working from home.
Macquarie says staff in China are working from home. Ian Waldie
However, the primary reason given was Chinese Lunar New Year, celebrations for which can last until the end of the first week in February, and not the coronavirus outbreak.
Plus, Macquarie has a suitably progressive flexible working policy in place anyway, meaning working from home is not unusual at the millionaires’ factory, they pointed out.
But it is understood that travel by senior Macquarie executives to China is being heavily restricted in line with government travel advice.
AMP is also reviewing all “non-essential travel” across Asia, while employees in the Beijing and Hong Kong offices of its AMP Capital funds management arm are working from home where possible.
“We are in close contact with our staff in China and thankfully none of them have been impacted by coronavirus at this stage,” an AMP spokesman said.
“We are continuing to review our response, and senior leadership is in daily contact with teams and clients based in the region.”
The moves follow decisions reported taken by global counterparts, with staffers at Credit Suisse, HSBC, UBS and Standard Chartered subject to restricted travel or work-from-home edicts.
Around 60 per cent of the beds in Scape’s portfolio are typically occupied by students from the greater China region.
The purpose-built student accommodation sector has boomed in recent years as private developers take advantage of the growth of foreign students in higher education. The sector is around 90,000 beds strong already, with forecast growth to 115,000 beds by 2022.
Major operators such as Scape, which took over the Urbanest portfolio in a $2 billion deal in December, controlling close to 14,000 beds across three brands, moved quickly a week ago to respond to the threat of the coronavirus.
Around 60 per cent of the beds in Scape’s portfolio are typically occupied by students from the Greater China region. Incoming students will be required to get medical checks before moving into any Scape facilities. A series of risk management measures have also been implemented, covering hygiene and cleaning within the buildings.
Executive chairman Craig Carracher said the emergence of the virus has been expected to delay arrivals of students who are unable to leave their homes due to travel bans. In fact, it appears the opposite is happening.
“That was the expectation on Friday. Over the weekend we’ve had a huge number of enquiries from students wanting to arrive early,” Mr Carracher said.
“They are wanting to leave unaffected areas in China area now before they could be affected.”
The bulk of Chinese students in this market come from the major hubs of Beijing, Shanghai, Guangzhou and Shenzhen. Industry players are hoping that offers a measure of protection to the sector in Australia.
Senex Energy chief executive Ian Davies said he saw the dip in crude prices below $US60 a barrel as “a little overdone”.
“As the Hubei province is not one of these traditional dominating sources of international student exporters, we anticipate that the impact on Australia’s international education market will be limited, as it stands,” Savills director of student accommodation Paul Savitz said.
“Further, we understand that universities will support international students with different enrolment options, including deferral if they were unable to commence in semester one.”
Lendlease, which has offices in Shanghai, where it is building an aged care facility, has cancelled all travel for its staff to mainland China, Hong Kong and Macau until further notice.
Its China offices and construction sites are currently closed for Chinese New Year. They are due to reopen on February 3, a week later than is normal for this time of the year, pending any significant developments in the spread of the virus.
Oil producers are bracing for a price hit from the virus for crude and jet fuel in particular, with analysts recalling the six-month impact from the SARS epidemic in 2003, which cut mostly jet fuel demand by up to quarter of a million barrels a day.
Oil stocks were smashed in morning trading on Tuesday, with some seeing their share prices dive as much as 8-9 per cent and even larger, more diversified producers such as Woodside Petroleum and Santos down as much as 3.7 per cent.
Brent crude hit a fresh three-month low on Tuesday morning, at just over $US59 a barrel, down about 14 per cent since early January.
“At this stage we are holding our nerve on our oil positions but it is a work in progress,” said Katana Asset Management portfolio manager Romano Sala Tenna, who said the oil market seemed to be acting as a direct proxy for global economic growth.
Senex Energy chief executive Ian Davies said he saw the dip in crude prices below $US60 a barrel as “a little overdone”.
“I struggle to get to this sort of price movement,” he said.
Jet fuel has been a bright spot in the market for energy demand growth over the past five years but the near-term outlook has now darkened as analysts count the likely cost of reduced air travel in the region.
RBC Capital Markets’ oil strategy team said jet fuel demand has already been hit, based on real-time observation of Chinese flights.
Using flight-tracker databases, it found departures from the top five biggest Chinese airports fell by nearly 800 flights this past weekend relative to the weekend before, while traffic in the five airports closest to Wuhan has fallen by almost 50 per cent over recent days.
S&P Global Platts Analytics said a virus as deadly and contagious as SARS would have a much larger impact on jet demand now than in 2003, with potentially 650,000-700,000 barrels a day cut from demand given the much heavier weight Asia now has on global aviation.
But it is pencilling in a potential reduction of up to 150,000 barrels a day on jet fuel demand, saying that the coronavirus does not look as deadly or contagious as SARS – at this stage at least – and governments now have better technologies to contain the spread of viruses.
Universities are facing one of the long-threatened risks to their business model, even if the cause is public health in China, not politics.
The government’s Global Reputation Task Force for handling the university sector had its first meeting on Wednesday under an expanded remit to respond to the virus.
The task force was meant to respond to the bushfire impact on university enrolments but is now focused on virus effects.
Chairman of the task force Phil Honeywood said the group had added an official from the Health and Home Affairs departments and two experts in student welfare.
While he was confident of meeting short-term problems, he was worried about the long-term threat to enrolments from China.
He said Australia needed to give a sympathetic and generous response to any would-be students from China or risk losing market to countries such as Canada and the UK, which already had the advantage of relatively more attractive visa programs for Chinese students.
“In the worst case scenario our sector’s enrolments and revenue could be reduced by up to 30 per cent and this will cause major ramifications for university budgets but [also] for accommodation providers and other areas of the national economy.
“The manner in which the Australian sector is seen to respond to this crisis will impact our viability well into the future.”
He said this would mean not charging for deferrals, making sure we refund on cancellations and doing everything we can to help students who want to come from China.