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The impact of coronavirus on the energy and resources industry

The last few weeks have seen the world face an unprecedented disruption with the novel coronavirus (COVID-19). First reported in China, we’re now seeing many countries shutting down for periods of time to try to contain the spread of the virus. Australia is facing a particularly difficult year given the bushfires that ravaged the country recently. Now with COVID-19 adding to the pain, the energy and resources industry is being impacted in several ways outlined below.

Transport is restricted 

With borders closed and transport restrictions in place in many countries, this is impacting both freight and people movements. Reduced airline and other transport mean lower demand for oil and gas, which is likely to have a direct impact on prices and the industry more broadly for the next few months.

Transport restrictions are also affecting raw materials, by-products (like sulphuric acid in copper production, for example) and final product, with some reports indicating that smelters and refinery productivity is being impacted as a result. It’s not clear as yet how long productivity reductions will be in place, and with the increased amount of shutdowns globally, the impact is likely to be felt in multiple regions.

Quarantine is impacting productivity

As people are quarantined to slow the spread of the virus, this will no doubt have a direct impact on productivity. As a result, more projects are expected to be delayed and demand for machinery reduced.

It’s also expected that retail activity will reduce, with fewer people purchasing cars and appliances. The demand for many resources may also be reduced as a result and the stock levels increased.

How some are responding

The government has already stepped in offering relief to some industries, most notably the airline industry received a $715m package this week which will certainly help reduce the impact.

According to the Minister for Resources, Water and Northern Australia, Keith Pitt, last week “It is clear resources exports are holding up with companies activating contingency plans to ensure their supply chains are maintained.” This view is no doubt being challenged by the recent volatility seen in the Australian Stock Exchange coupled with new restrictions on transporT.

Some facilities are responding to a decline in production by bringing forward periodic maintenance work. While others are reviewing contractual terms and insurance policies to determine if they have any recourse or can trigger force majeure clauses. Some contracts simply may not allow companies to reduce production which may be frustrated further by transport issues and lower demand.

For those organisations that are currently negotiating arrangements, specifically ensuring that COVID-19 and any other pandemic are specifically covered is also prudent. In particular, addressing who bears the cost and risks associated with shutdowns, oversupply or inability to supply are all contingencies that now need to be addressed.

The issue with COVID-19 is that no one knows how long the shutdowns will continue. If the virus can be brought under control quickly, the long-term impact may be able to be absorbed over the course of the year. But if it’s prolonged in major production centres, we may soon face shortages that will have a ripple effect across multiple industries and economies. It’s still too early to say how long it will be until life returns to normal, but we’re keeping a close eye on the situation.

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