04.03.2020

Update: Coronavirus impact on exports & wider supply chain

In early February we wrote about the emerging Coronavirus in China and the impacts we were seeing in key industries such as forestry, tourism, agriculture and fisheries.

There has been plenty written in the media over the last month and it is evident that this has become a wider global issue.  While there may be debate about the actual risks and severity of the illness itself what is clearly evident is that there are real impacts on the local and global economy.  

On the downside Statistics New Zealand have reported an estimated impact of around $300M in lost exports to China over the last month. Global and local share markets have taken a hammering over the last week. Disruptions to global supply chains are creating issues around supply that is impacting on unrelated industries unable to source parts or products necessary for their operation.  

On a more positive note, we are seeing some local businesses take opportunities to fill gaps in the supply chain.  As an example, we have connected one local manufacturing client who was running short on packaging, previously supplied from China, with another client who manufactures a similar product locally who can fill that need.

Forestry is a key industry for our business and has been one of the hardest hit.  Some key points on this sector:

  • Offtake of softwood logs from Chinese ports ground to a halt from early February and recovery to date has been minimal.  Sources vary, but we are told that off-take has between 5,000 m3 & 25,000 m3 a day.   By comparison March 2018-19 average offtake was around 70,000m3 per day.  Given supply already “on the boat” softwood port stock has grown to record levels, with sources placing this between 5.0Mm3 and 6.0Mm3.  This is roughly 1Mm3 higher than peak 2019 inventory plus there is additional EU spruce inventory estimated at over 1Mm3 which is spread around a large number of container yards in China.
  • NZ supply into China was at normal levels into February, but in March will have a record one month supply reduction.  It is likely to be below 50% of regular levels with most forest owners operating at reduced cut and focusing on domestic production.  Thankfully the domestic market has remained strong. 
  • Indications are that up to 30% of logging crews have been stood down, and the majority of others are working to a reduced capacity.  The issue is impacting crews and related industries such as trucking throughout New Zealand but some regions are impacted worse than others depending on the degree of domestic supply and processing vs raw log export.  Data released by the Forest Industry Contractors Association as of 21st February shows regional impacts as below, although since then there have been additional stand downs in regions such as Northland so actual numbers today are likely worse than indicated in this graph. 

Estimated number of people affected by COVID19 disruption


 

This article provides a good overview of the current situation https://www.interest.co.nz/rural-news/103870/scott-downs-reports-very-difficult-start-2020-forestry-industry-china-inventories

Going forward the situation remains uncertain.  In the short term there remains more log supply into China than offtake.  We hear of concern that this may see further stand down of, or reduction in daily volume targets for logging crews in the next few weeks.  Should Chinese manufacturing get cranking over March and offtake returns to more normal levels the inventory peak will be in March, and stock levels will start to deplete from April onwards.  It is probable that stimulus measures will be applied to the Chinese economy and demand may increase rapidly. A lower NZD/USD exchange rate (from around 0.67c to 0.62c since 01 Jan) and lower shipping costs will help NZD AWG (At Wharfgate) returns.  If this is the case we may see a return to balance in supply/demand in around three months.  It is also likely we will see some local economic stimulus such as an OCR reduction, now predicted by most bank economists on or before the Reserve Bank’s next OCR review in late March. 

However, downside risks apply and should the Chinese economy take longer than anticipated to return to normal, or the Coronavirus more widely impacts the global economy, then forestry along with other key export industries may suffer a more prolonged downturn.

As a business we have been closely engaged with the major banks and asset financiers.  Most have been quick to provide financial assistance such as interest only or deferred payments for what they see as an adverse natural event outside the control of individual borrowers, however the degree of assistance and the amount of information required by lenders does vary.  If your business has been materially impacted it is important that you talk to your Finance New Zealand Business Partner and we engage with lenders on your behalf.  

When we wrote in early February we hoped this situation would quickly correct itself once the Chinese Lunar holiday period ended.  Clearly this was not the case and we expect impacts through 2020.  One of the strengths of our business is the ability to engage with multiple lenders across a wide range of financing products.  We feel comfortable in our ability to help customers manage both the impacts and opportunities that may come from this event.