March 17, 2020
Peter Colley, National Research Director
I spend some of my time trying to work out where the coal, iron ore and power generation industries are heading – both in the near term and longer term.
But all the recent data, and all the recent forecasts, now mean little as we are in the fairly unknown world of a major public health crisis. Coal mining and coal power already endure more uncertainty due to new energy technologies being deployed in Australia and overseas, and the anti-export-coal campaigns of green groups. And whatever the governments of the world decide to do about global warming. And we had the impacts of the huge bushfires.
The uncertainty level has now been multiplied. The only thing we know for certain is that the next six months will be entirely different – grimmer – from the same six months a year ago.
As of Friday 13 March Australia has actually done a better job than most countries of controlling the coronavirus outbreak with few deaths and about 160 cases. But that effort is mostly about slowing down the rate of infections so that the health system and the economy has a better chance of coping.
Even if we just try to focus on economic impacts on our industries we have so many variables to consider. Here are three broad parameters:
- How much demand for coal will fall – mostly in overseas markets but also domestically
- How much international trade may slow due to illness and quarantines at ports and on shipping, and business uncertainty
- How much mining operations here will be disrupted by shutdowns due to quarantines, workforce shortages or government-mandated measures.
Overseas demand for coal will fall – steel industries have or are slowing down. Coal power is an essential service and will keep running – but electricity demand by industry will fall so coal consumption will decline. Will it be modest – say 10% over six months and 5% for the year? I don’t know.
Will shipping and trade continue to run normally or near normally? There are the problems of quarantined ships and ports. Possible crew shortages and delays. Beyond that, there is a concern that if some companies are in financial trouble, then transactions may be called into question. It’s also possible that the banks that have to stand behind every transaction may get nervous about backing the trades. That happened in the Global Financial Crisis but we hope it doesn’t happen this time.
Mining operations will be affected – by a downturn in demand, by government measures (eg on transport) and by illness and quarantines among workers. Those with poor employment security – casuals, labour hire, contractors – face loss of work. Permanent workers have more security, but there can still be stand-downs if work is not available. Qantas has cut 25% of all flights and says 2,000 workers are temporarily surplus to needs. No stand-downs yet but who knows?
The big downturn in the sharemarket has two obvious impacts. Companies that have high levels of debt may find they are breaching debt to equity ratios or other conditions with their lenders. And all workers’ superannuation balances are taking a hit. Which matters most for those with higher balances and nearer retirement.
How long will this last?
What does recovery look like?
If we are into a recovery by September that will be fairly good. “Recovery” in this context means:
– New infections in strong decline
– Economic activity increasing steadily
– Businesses having confidence to resume normal operations / expand
As soon as “recovery” is clear the stock market should recover strongly – its speed of recovery will tend to be faster than the reality on the ground.
Various sectors will take a long time to recover – tourism an obvious example. Airlines too – because many businesses will have become used to substituting online meetings for in-person meetings. Mining should recover relatively easily but much depends on how demand recovers. The experience in China is that recovery is now underway, but it’s a struggle to ramp up to previous production as many workers returning from Chinese New Year find they have to undergo a further 2 week quarantine when they return to the city where they work.
A final comment, and it’s not about the economics. We know that young people are largely unaffected, and that most adults will experience only mild symptoms. That’s good news. But look out for older people and those with weak immune systems. They need the most help to avoid getting infected or to recover when they do fall ill. In Italy the government is encouraging people to comply with the nation-wide home quarantine by saying “think about your grandma; do it for her”. Sound advice.