Ruchi Agrawal | Anubhav SahuHighlights
-Sharp volatility in stocks expected if situation aggravates
The outbreak of the deadly Coronavirus poses a risk to not just human beings, but also business houses and economies. The implications are varied -- both geographically and sectorally. While many are comparing the outbreak to the SARS epidemic in 2003, the potential impact of a large-scale attack is still being assessed.
The current situation
Frequently Asked Questions
A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.
There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.
Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.
So far, 170 deaths have been reported, with nearly 4,600 confirmed cases of infected individuals. China has imposed travel ban and taken quarantine measures that could impact local and global trade dynamics.
The virus is spreading rapidly and the painful impact is expected to intensify. Many major cities in China have been locked down to check the spread. This is leading to a shutdown of several businesses and production units.
The likely consequences of the flu are already being priced in by markets globally. Chinese equities have fallen by 5-6 percent from their January 20 highs. Oil has slumped by more than 10 percent in the past few days whereas gold is at its 6-year high.
China, the origin of the virus, is a major producer of many chemicals that find their application in agrochemicals, formulation chemicals, pharma, consumer durables, automobiles and the like.
India's agrochemical industry is heavily linked to and dependent on the Chinese imports for its raw material requirements.
The Hubei province, which is at the centre of the current epidemic, is a key manufacturing hub for chemicals. The nearby hubs of chemical manufacturing – Anhui, Jiangxi, Jiangsu and Zhejiang – are also major centres for herbicides, specialty chemicals, dyes, resins and agro intermediates.
With the lockdown of several cities and the mounting threat of closure of production units, there are rising concerns of interruption in supply of these chemicals. And if that happens, it may create a scarcity of many such chemicals and drive up their prices.
While many production units are now closed because of the Chinese New Year, the actual impact will be clear once the holiday season is over. Officially, the Chinese holiday is extended to February 2 nationally and February 9 for Shanghai.
Our view is any interruption in raw material supply could affect production costs and the process itself for Indian agrochemical players. Our interactions with the companies suggest that the existing raw material inventory would help them scrape through for nearly the next two months.
However, if the impact persists or aggravates, there could be acute input scarcity, leading to a surge in costs or even halt in production. In either of the cases, the consequences will not be healthy and could spill over to their overall performance in coming quarters.
In the recent past, the margins of many agrochemical companies came under severe strain due to supply disruptions from China. In 2018, stricter environment laws in China forced many production units to wind up.
India faced the ripple effect. The margins saw a sharp contraction in the following quarters before the authorities could get a grip on the situation with alternative sourcing.
While importers from China are likely to be adversely impacted, it might come as an opportunity for a few which are into manufacturing of technical grade chemicals as the demand of their product may rise.
So, any uptick in prices would benefit these producers. Plus, any shift in sourcing of specialty chemicals by developed markets from China to India would be another positive.
We believe that the current epidemic calls for caution. In the current scenario, intensive quarantines and travel bans will hit the Chinese economy hard. While the country is much better equipped to handle the crisis, the lockdowns will ripple through trade and travel.
The potential impact of these aggressive steps is likely to play out in many sectors, especially the commodity-linked ones like agrochemicals. This could spell more uncertain times for agrochemical and specialty chemical producers. The second-level impact would be more widespread across sectors and macro indicators.
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