Israeli Firms Start to Feel Pinch of Coronavirus, but Aren’t Panicking

Stock exchange rebounds from Sunday’s selloff. Analysts say economic impact on Israel and the world hinges on how long the epidemic lasts

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Travelers wearing masks are seen at Guarulhos International Airport in Guarulhos, Brazil, February 3, 2020.
Travelers wearing masks are seen at Guarulhos International Airport in Guarulhos, Brazil, February 3, 2020. Credit: REUTERS/Amanda Perobelli

Israel’s biggest companies were broadcasting calm on Sunday and Monday amid growing concern about the global economic impact of the coronavirus pandemic. And after a round of selling on the Tel Aviv Stock Exchange on Sunday, it seemed investors were for now discounting their worst fears.

After dropping 2.8% on Sunday, the TASE’s benchmark TA-35 index closed 1.25% higher on Monday at 1,654.63. Although one company, the fashion retailer Adika (see story below) said its operations would be affected by developments in China, other Israeli firms with exposure to the country said that for now their operations wouldn’t be affected.

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The latest to issue an assurance was Delta Galil, which told the TASE in a statement Monday that even though it had been notified that one of its Chinese subcontractors would be extending a plant shutdown by another week, till February 9, it would not have a “material impact” on its operations. The company, a maker of intimate apparel, said that among its factories and subcontractors in China, none were located in the Hubei Province that is the epicenter of the coronavirus outbreak.

Israel does a lot of business with China. Although the U.S.-China trade war put a damper on them, merchandise exports to China and Hong Kong still amounted to $7.7 billion in 2019, or 11% of the total. Service exports added another $1 billion. High-tech accounted for the lion’s share of that.

Big China weighting

On the import side, China has an even bigger weighting because it supplies such a wide range of products, both finished goods and components, that an extended shutdown of much of its economy threatened to reverberate throughout the world.

In a report released on Sunday, Bank Leumi said it was too early to say with certainty what the impact of the coronavirus would be. If it runs its course within a few weeks, the Chinese and world economies should be able to bounce back. For now, however, it is wreaking havoc, analyst Shmulik Arbel said.

“We’re in real-time contact with our clients in China. Some of them say they can’t even reach people connected with their business. If this continues for a few months, the situation will become serious,” Arbel said. “In the meantime, our Israeli clients aren’t panicking and are behaving cautiously. We’re at a critical junction,” he said.

Israeli companies are in a better position than they would normally be because many stocked up on inventory ahead of the Chinese New Year that began two weeks ago. For the main inputs that Israel imports from China, such as plastics, pharmaceuticals and chemicals, Arbel said many Israeli companies were already looking for substitute suppliers elsewhere in the world.

Among Israeli companies that have Chinese operations, Ham-Let, a maker of instrumentation valves and fittings for industry, said local authorities in the area where its Chinese plant is located had extended an enforced holiday by a week. It said that to make up for the lost production, it would have employees working 24/7 when they return. Ham-Let shares fell 4.3% on Sunday but clawed back 0.8% of their value on Monday to end at 60.18 shekels ($17.47).

Avgol, a maker of non-woven fabrics, also reported that its Chinese plant was on an extended enforced holiday but said this would have no material impact on its operations. Its shares plunged 6.3% on Sunday and continued trading lower on Monday to fall another 2.6% and finish at 2.17.

“At the moment, we’re getting [from companies] just spot reports. The real impact we’ll only see in the first quarter 2020 financial reports,” said Tiran Rothman, CEO of the consulting firm Frost & Sullivan Israel. “However, if the affair continues another two or three months, it may have an effect on construction and textile companies. All companies are on the fence now because international activities have frozen.”

Strauss Group, Israel’s second-largest food maker, has exposure in China due to its water purification joint venture with the Chinese company Haier. Its shares fell 3.3% on Sunday but edged 0.6% higher the next day to end at 98.80 shekels..

Other Israeli businesses affected by China are El Al Airlines, which suspended flights to Beijing (but not to Hong Kong) last week. After falling sharply on the news, El Al shares recovered to rise 0.7% on Monday to 93 agorot.

The Israel Manufacturers Association said Sunday that it had opened a situation room to deal with coronavirus-related issues. It will help companies facing difficulties regarding getting paid, locating substitute suppliers and help with red tape.

The association said it expected that thousands of companies in Israel would be impacted by events in China. Many manufacturers have discovered that raw materials they were counting on from China have been delayed.

“As a result of delayed shipments from China and in order not to disrupt production [in Israel], many companies have approached suppliers in other countries to ensure continued delivery of raw materials,” the association said. But, it warned, “Imports from other countries are expected to raise production costs and lead to higher prices.”

In the tech sector, Orbotech, the Israeli unit of the U.S. company KLA that makes equipment serving the global electronics manufacturing industry, derived more than 40% of its sales in 2017 from China and more than 80% from East Asia.

Mellanox, an Israeli semiconductor company due to be sold to the U.S. company Nvidia, has 120 employees in China in cities including Shanghai and Shenzhen. The company said it had suspended all air travel by staff between the two countries.

“The company has donated [medical] masks to all its China employees and is monitoring government announcements and adhering to them. At this time, the situation has not had an effect on the company’s business,” Mellanox said, adding that it was awaiting Chinese regulatory approval for the Nvidia deal.

Construction labor shortage

Israel’s construction industry, meanwhile, faces the threat of a labor shortage due to its reliance on Chinese guest workers. Some 7,000 Chinese are working in construction nationwide, 10% of them on the Tel Aviv Light Rail project.

Housing and Construction Minister Yifat Shasha-Biton said Sunday that she would seek extensions for 1,700 Chinese workers to remain in Israel, even though they had been due to return home at the end of December.

Industry sources said the coronavirus would have no immediate impact on the pace of construction, but it may undermine efforts to import more workers to step up the pace of building. Demand for building workers from other countries is likely to rise because contractors cannot get Chinese labor.

Palestinian labor from the West Bank could be an alternative, except that the army has not translated its agreement in principle allowing more Palestinians to work in Israel into a change on the ground.

“The construction sector for the last two years has been working at a record pace of building starts and needs every pair of hands it can get,” said Raul Srugo, president of the Israel Contractors Association. “It’s critical that the housing and interior ministers, as well as the Immigration and Population Authority, reach an agreement on a plan to let the workers who were scheduled to return to China [remain here] until another solution is found.”

He said Israel was not building enough homes to meet demand, and urged the government to boost the quota of foreign construction workers, which now stands at 16,000, to 26,000.

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