Swine flu - Return of “silent but deadly”: An economic evaluation of pandemic flu [ING / CG / JPM / GS]

ING – Return of “silent but deadly”: An economic evaluation of pandemic flu

Pigs, not birds, may be the vector from which the next global flu pandemic will spread.

The World Health Organisation is still assessing the situation – the new virus A/H1N1 has only been confirmed in a few cases, and the mortality rate has been low so far.

But human to human transmission seems to be confirmed, and the disease has already spread from Mexico, to the US and Canada.

The economic impact of a disease like this depends on a complex interaction between its infection rate, and its mortality.

It may be that this swine flu does not tip the human fear scale sufficiently to result in substantial economic / market damage…

…but if it did, with the economy already in tatters, the results could be catastrophic.

Citigroup – Swine flu and its impact on asset prices

A study of SARS suggests that FX in heavily impacted countries tends to under-perform until newspaper headlines are close to peaking
In the case of SARS this lasted for almost 1.5 months. On a 2 months basis the negative performance was reversed
Rates in heavily impacted countries outperformed US Treasuries slightly
But this time the world may be better prepared

JP Morgan – Swine Flu Impact on Global Equities
The potential impact of swine flu on the global economy has been a main driver of the slump in risk markets overnight. While any major epidemic would be a decidedly bearish event for both energy markets and the global economy as a whole, predicting the actual impact of the flu on energy markets is difficult at the moment considering how little is known about the flu strain involved and the extent of the outbreak.

With so much uncertain, the SARS epidemic in 2003 provides one potential counterpoint. The first cases of the respiratory disease occurred in China in late 2002, but infections did not reach critical levels until Q2’03. As cases appeared in Hong Kong and Taiwan, governments issued travel warnings and air travel in particular ground to a halt. Global passenger air traffic fell 8.2% yoy globally during the quarter and over 19% in Asia alone.

Until the outbreak, total oil demand growth had been trending at a very strong 10% yoy in the primary countries affected (China, Taiwan and Hong Kong) due to very strong economic growth. Oil demand YoY comparisons fell sharply to just 3.0% yoy in Q203; unsurprisingly, transportation fuels (jet fuel, gasoline, and diesel) were the most affected. If oil growth had continued apace and the epidemic not occurred, regional oil demand from the three main countries affected could have been potentially 520 kbd higher – around a 1.0% blow to global oil demand for the quarter.

Price impacts were mixed, but particularly dramatic for jet fuel. The Asian regrade – the regional differential between kerosene and gasoil – bottomed out in late March 2003 as travel warnings were put into place in Asia and flying slowed. WTI prices averaged 16% lower in Q2’03 than Q1’03, with prices reaching their annual daily low of $25.24 on April 29; however, this was due not only to the SARS epidemic but also the resolution of several ongoing supply issues, most importantly the PdVSA strike in Venezuela and the end of initial US military operations in Iraq.

What are the implications for the present? While the global spread of the swine flu would almost certainly have a negative impact on global transport, trade and ultimately energy consumption, it must be remembered that the global recession has already taken a severe toll on oil demand. Preliminary data show global oil demand has fallen 3.4% (a nearly 3.0 mbd contraction) in the first quarter and a 5.2% contraction in Mexico specifically. In contrast, the SARS epidemic occurred at the beginning of a period of rapid economic growth in Asia and oil demand in the region rebounded practically unscathed later in the year. For the moment, the initial flu news has created the specter of a potentially globally economic depressing event just as the markets were evaluating the prospects for economic recovery. An event of legitimate severity would be bearish for both crude and transportation fuel prices.

Goldman Sachs – Commodities: Swine flu important to monitor, but impact likely limited at present

Although it is important to monitor developments, we believe that the impact will likely be relatively limited unless the source of concern extends meaningfully beyond Latin America. However, the net impacts will be ultimately driven by policy and consumer response in the days ahead.

Impact on agricultural balances likely limited...

Swine flu has not been observed to be transmitted to humans by eating pork, although consumer misunderstandings may still reduce pork demand and pressure lean hog prices (with potential benefits to cattle if consumers switch to beef). Past history reflects such consumer concerns; poultry demand dropped in Eastern Europe and East Asia when avian influenza appeared in 2005/2006 and US beef demand declined on Mad Cow fears during 2003/2004. We believe that the risk of a material decline in US pork demand is limited given aggressive US policy response and broader consumer education, but some moderate demand response may occur. On the foreign front, bans of US pork imports are more likely, led by Russia and China, but bans so far have not affected key hog-producing states. On the supply side, any widespread hog culling could provide hog price support as well as depress feed grain demand, but the likelihood of that is small at this point given the apparent concentration of infected animals in Mexico.
...as well as on oil

A flu pandemic has the potential to impact demand for oil more so than for meat or feed, given the possible implications for industrial activity and for travel. During the 2003 SARS outbreak, we estimate that global oil demand was reduced by about 1 million b/d, with about half of that reduction occurring within China owing to factory closures, a general decline in activity as individuals stayed at home and a collapse in travel in and to the region. However, we believe that the scope of the current outbreak would have to become much larger to approach a similar impact as noted in 2003, given that Mexico comprises a smaller manufacturing base and the volume of travel to Mexico and around the region is also generally much smaller. In net terms, the source of the concerns would have to spread meaningfully beyond Latin America to have a significant impact on oil demand, in our view.