Supply Chain Impacts Seen as China Coronavirus Spreads
Fears of the coronavirus in China spreading there and globally are affecting world markets, and the construction industry is bracing for slowing economic growth, at least in the short term.
Some U.S. construction participants are seeing or fearing domestic project interruptions from materials sourced in China, according to a Feb. 20 Bisnow report, while Canadian Construction Association experts urged the audience of a Feb. 18 webinar to analyze supply-chain "vulnerablities," said a Daily Commercial News report.
Hong Kong's construction industry has laid off 50,000 workers as work slows due to disrupted China-based labor and materials supply, said a Feb. 24 report in The South China Morning Post.
Coatings manufacturer PPG announced a $144,00 corporate donation and employee matching to China relief efforts on Feb. 24 but did not detail virus impacts to its 4,000 China-based employees at 16 manufacturing sites and four technical centers in the country.
The epidemic, which is centered in Wuhan in Hubei province, has already killed more than 2,000 across the country and beyond, with the bulk of fatalities and the 75,000 infected people in the province.
"The coronavirus is showing itself to be a potentially serious risk to the Chinese economy, and it is safe to assume that economic growth in China will be impacted both this quarter and next," says Richard Branch, chief economist at Dodge Data & Analytics.
“China’s economy has been slowing anyway, and now, just when a phase-one agreement on trade has been reached with the U.S., there is the coronavirus flareup,” adds Alex Carrick, ConstructConnect chief economist. “Travel restrictions and plant closings will cost the economy dearly.”
Chinese President Xi Jinping said that big projects, especially those in manufacturing, should start construction on time, adding that boosting consumption was a key hedge against the epidemic’s impact, Reuters reported on Feb. 15.
But China’s construction industry is facing pressures from the virus because most building sites are in urban areas and remain shut dowh, with workers and contractors, who come from all over China, having more trouble returning to work, according to World Cement Association CEO Ian Riley, reported by the Financial Times on Feb. 14.
He said that while demand for cement is typically lower in the first quarter, production recovery will be slower this year, as manufacturers face new logistical issues in transporting material. The association expects the Chinese government to implement stimulus measures to boost spending on infrastructure once virus spread is better controlled. which could concentrate annual demand in the second half, potentially leading to supply shortages and higher cement prices, says the Times.
Ken Simonson, chief economist at the Associated General Contractors of America, suggests that U.S. hotel and entertainment venues, particularly in Las Vegas and Hawaii, could be vulnerable as tourism declines. "Depending on how long this lasts and how widely it spreads, some hotel, resort and casino projects might be put on hold," says Simonson, adding "airlines with a lot of flights to China might also defer construction if their cash flow is pinched. Manufacturers that depend on materials and products from China are likely to find production reduced or cut off, as well as air and perhaps ocean transport."
The crisis is being closely watched by Danish wind turbine giant Vestas, which has a large component manufacturing base and supply chain in China and could be more exposed than rivals, analysts say. In a Feb, 4 earnings call, CEO Henrik Andersen predicted that halted operations were likely to restart by mid-month, but “we are not the ones to decide.The whole supply chain has to decided.”
China is now developing what could become the world's largest offshore wind market over the next decade.
'Pandemic Force Majeure'
If the coronovirus causes a long shutdown, “the whole world will face a pandemic force majeure of some sort that we will have to deal with,” Andersen said. “It’s as worrying [to Vestas] as much as it affects the whole global supply chain.”
Asked whether Vestas can compensate for the delay, Andersen said the company will compensate as much as it can, but “we can’t rush, blades have to cure.”
Markets analysis firm Fitch Solutions outlined, in a webinar on Feb. 7, major risk factors for the Chinese economy and for global markets.
China market analyst Brian Coulton at Fitch Ratings says that because the country’s services sector accounts for a larger share of GDP today than in 2003 during the SARS virus epidemic, “the much harsher official ‘lock-down’ restrictions in place would also imply that, if the [coronavirus] epidemic were to last three months, its economic impact would very likely be more severe.”
Overall commodity prices were down 1% last week, according to the IHS Markit Materials Price Index, with a decline in eight of ten commodities measured, with the coronavirus a key factor, says John Mothersole, IHS Markit director of research for pricing and purchasing.
"All the positive momentum that markets had been showing exiting 2019 has vanished," says . Prices for pulp, metals, natural and synthetic fibers, and chemicals declined last week after experiencing gains since December.
Mothersole suggests that oil, already a “vulnerable commodity,” could also be affected.
“IHS Markit energy experts' initial view is that mainland Chinese oil demand could be as much as 500,000 barrels per day lower for the duration of the epidemic—weaker demand that is unlikely to be offset by higher demand elsewhere. Given that mainland China represents about half of projected oil demand growth for 2020, and given strong projected supply growth this year, oil markets could be exposed,” Mothersole says.
Reports on impacts to construction projects in China are spotty.
ENR sources within the country say the Ministry of Housing and Urban-Rural Development has issued, for at least a handful of provinces, an official notice to delay all construction projects, with approval required to resume. One source says the delay could last until the epidemic runs its course.
Authorities in Guangdong province in southern China have issued stiffer directives on urban domestic sewage treatment, particularly wastewater from virus treatment facilities.
Sources say there have not been dramatic impacts on Chinese projects abroad, such as in Africa, because many project managers generally have not traveled home for the New Year holiday due to expense.
But Industry sector managers in Israel, where China has had a major construction presence over the last decade, express concern that materials shortfalls are already apparent due to worker restrictions, says a report in Ha'aretz. They point to suspended shipments of stone for paving and building facades, with plumbing fixtures, tiles and coatings ikely to follow.
As work begins to resume in China, precautions are being taken by some, including Shanghai-based architecture firm CCDI, whose staff resumed work on Feb. 10, says company manager Chen Xiaomin. But he notes that staffers were encouraged to work at home for the next few weeks, “ since this virus has around a 14-day incubation period.”
Michael Kavanagh, principal at a Hong Kong-based construction management affiliate of New York City building contractor STO, says authorities in Guangdong, where most of its subcontractor facilities are based, have alerted businesses not to open until Feb. 17.
“There are a lot of products manufactured in China being shipped around the world—steel, wood, plaster, aluminum, glazed partition systems, cement and cementitious products, paints, HVAC equipment, electrical equipment, light fixtures—the list goes on,” he says, noting that production may still not be back to normal until March, “if they are able to control the virus.”
But Mothersole suggests this may be an overreaction. "Assuming the impact on the mainland Chinese economy is not more than a temporary shock, which at present we believe to be the case, commodity markets may soon return to the guarded optimism they were displaying at the end of 2019, with prices recapturing any losses," he contends.
Branch agrees. "While some of that economic loss will be permanent, China’s economy will rebound once there are signs that spread of the virus has been contained. The U.S. economy will not be immune; however, over the long-term the impact should be limited. We’re expecting a negative impact on first quarter GDP that should reverse itself in subsequent quarters."