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Sunday, March 29, 2020

COVID-19 Impact on Different Business Sectors

Disclaimer: This article is a personal viewpoint of the author and does not constitute professional investment advice nor it is written with an intent to form an opinion on the equities market or promote any specific stocks.

The spread of COVID-19 is likely to leave a long-lasting impact on our economy, culture and way of life. We will make a short analysis of its commercial impact on various business sectors especially those with a strong presence on the Pakistan Stock Exchange (PSX). Currently, the pandemic spread threatens our economy as industrial activity grinds to halt but also erodes out individual prosperity due to mass layoff. And risk pushing more population below poverty in an already fragile economy facing many challenges. 

Cement & Steel: construction has ground to halt and the labor movement is severely restricted due to inter-city transport shutdown. Cement plants have ceased all major production in compliance with government directives to limit the spread of COVID-19 infections. Cement off-take from dealers has also come to halt. In the absence of any government-backed incentives, the sector will struggle a lot to stand on its own. 

Food & Edibles: while eating is essential for survival, the sector is not immune to COVID-19 induced economic shocks. Demand is already shrinking due to lockdowns, especially of commercial food outlets. Many households are suffering a partial or total loss of income which leads to the rationalization of food spendings. Prices and profitability can take a further hit due to COVID-19 induced economic recession. 

Energy & Oil: While electricity demand is expected to stay relatively stable due to a large number of population staying at home, there is a limited movement out on the street. Fuel consumption per capita has fallen at large while global crude prices continue to slide downwards. There is a risk of inventory losses on the pre-crisis accumulated stock of fuel by OMC while OEP can be hit by lack of demand at the refinery level which is in-turn fueled by demand-side losses of OMC - its a round cycle feeding off each other. Impeding risk of recession can further erode long term purchasing power which will hit fuel demands as consumers cut the cost of living by adapting to cheaper modes of transport. Power generation can face short term cash crunch due to probable government back package of deferred payment facility for power and gas bills. Combined with the risk of recession and loss of income for households and industries, there is higher exposure to the financial risk of consumer's default. 

Finance: Shut down of production, reduction in household income and cancellation of export orders can create financial pressures across the entire economic chain. Financial institutions are exposed to a greater risk of non-performing loans, higher demand for risky debt restructuring and even outright defaults. 

Pharma & Health Care: Demand for pharmaceuticals and health care is naturally expected to increase during any bio-emergency. Foreign multinationals have announced significant success in their combat against COVID-19 by exhibiting a plethora of drugs, vaccines, research and testing kits. This may have a fallout positive impact on their locally affiliated pharma companies listed on PSX. Shortages of raw materials from China and India along with transport related difficulties due to shut down of air-traffic are looming concerns of the pharma industry ( source ).

Auto: this sector has already been on a ventilator even before the COVID-19 crisis was ever heard of. And the impending risk of economic recession and disposable incomes being hurt does not look like a good spell for this sector. Some manufacturers have offered to produce medical goods which may keep their production capacity engaged but the volumes may not be big enough to cause any miracle financial turnaround in the short to medium term. A significant interest rate cut can be a boost depending on how much traveling habits return post-crisis. 

Fertilizers: So far lockdown does not seem to have any significant restriction on agriculture activities and the government is showing a soft corner towards the sustenance of this sector by offering financial incentives. This aims to reduce farmer's hardship and reduce food production costs overall. Cheap and plentiful food is essential for quick post-crisis recovery and avoids extensive deterioration of the lower-class shall the recession persist longer than expected. 

Textile: A labor-intensive industry already in economic doldrums is expected to take the harshest hit from COVID-19. Export orders worldwide are at risk and we should expect no exceptions. While the real magnitude of the crisis will be known post-crisis, looking around the world for impact on a similar industry does not paint a rosy picture. Two billion dollars worth of export orders were canceled in Bangladesh alone ( source ) while Pakistani exporters are also complaining about the rise in order cancellation ( source ). The textile sector has the potential to partially recoup their losses by reorienting their production towards medical supplies in demand such as face mask, protective suits, etc. 

Chemical & Personal Care: A large part of chemical production is geared towards agriculture and textile to results at large depending on their sectoral specialization. Those in agriculture and hygiene chemicals are expected to fare better than the rest. Personal care is also expected to fare better during and post-crisis as demand for soap, handwash, sanitizers and different hygienic products shoot up due to health-conscious public. 

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