When your biggest trading partner’s biggest port is closed, this is cause for some head-scratching.

We all know Shanghai will open eventually, at least partially, at some stage. This allows a classic 'look across the valley' approach by financial markets. However the real world impact on Australian exporters is perhaps deeper than markets are appreciating.

The return to normal operations in Shanghai is no re-open tomorrow scenario.

We have seen the rather dramatic effects of a Covid slow-down at the Port of Los Angeles which has still not caught up on the backload there. Given a more efficient out of port transport system in Shanghai, the recovery should be a little quicker, but the question remains when will that be?

In recent days there have been just the first deaths from the current outbreak. The severity of the lockdown will lead to a more immediate peak in both hospitalisations and deaths than would otherwise have been the case. The health effectiveness of the lockdown however, is what will lead authorities, despite rising resident opposition, to maintain the lockdowns, fully or partially, for quite some time.

The point cannot be minimised. The world’s biggest port is closed.

This has a global impact. The incredible variety and range of goods that move through Shanghai mean that almost all sectors of products globally are effected in some way.

Access to other ports could also be problematic, from the risk of lockdowns there and land transport solutions.

It is estimated that 40% of China’s economic activity is now either closed or reduced. So demand as well as the ability to get goods to market are suffering.

While Australian exporters will simply have to adopt a 'wait it out' approach, and consumers may simply see some shortages of products, the current lockdowns in China are a very real threat to the Australian economy over the medium term as well. Coming, as they do, on the back of a general and stated policy of China shifting away from Australian products.

Whenever there is an interruption to normal patterns of business, there is an increased likelihood of transference to a new supplier of inputs and food goods.

The current closure of the Port of Shanghai may hasten China’s shift toward other nations for agricultural and mineral resources.

If there were to be a financial market impact, this would likely first be felt in mining stocks and then in the value of the Australian dollar.

In just the past few weeks, the Australian dollar has fallen 3.3 cents, to now have recovered 1.4. This is extreme volatility. The long term outlook most probably remains toward my 65 cent target. The IMF has again highlighted our dependence on China. Should China continue to shift away from Australia this will impact both the economy and currency significantly.

Finding a way forward by both political parties is important to Australian families.

Clifford Bennett
ACY Securities Chief Economist.

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett.

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