March 2, 2020 / 12:36 AM / in a month

Virus jolts S.Korea's factory activity, exports shrink to 6-1/2-yr low - PMI

SEOUL, March 2 (Reuters) - South Korea's factory activity shrank faster in February, as export orders contracted at the quickest pace in over six years in a shattering blow to production, a private survey showed on Monday, as the coronavirus chilled global demand and business activity.

The Nikkei/Markit purchasing managers' index (PMI) fell to 48.7 in February, from 49.8 in January, and stayed below the 50-point level that separates growth from contraction in nine of the past 10 months.

New export orders suffered their worst decline since August 2013, as the rapidly spreading virus wreaked havoc along global supply chains, with strict travel and other containment measures in China disrupting factory production and business operations in China and the rest of the world.

Factory output in South Korea was also hit hard, with the gauge tumbling to 44.4, from 50.1 in January, marking the sharpest decline in nearly five years.

"Unsurprisingly, the South Korean manufacturing sector was hit by a dual-pronged negative shock to the demand- and supply-side of the economy in February amid the COVID-19 outbreak," IHS Markit economist Joe Hayes said. The epidemic, which originated in China, has claimed the lives of nearly 3,000 and roiled global financial markets as investors and policymakers braced for a potentially steep knock to world growth.

Most of the deaths were in China, but fatalities have also been recorded in several countries, including South Korea, Japan, Italy, France and Iran. Fears have swept across South Korea as confirmed infections spiked from 31 to over 3,700 in less than two weeks as of Sunday.

Anecdotal evidences showed the epidemic could extract a heavy toll on the auto industry. Major exporting companies including Hyundai Motor Co and Samsung Electronics have partially shutdown their production lines after workers tested positive, while LG Display has also shut a display module plant for disinfection work until Tuesday.

Total new orders returned to contraction after expanding for two months in a row, the survey showed, but the rate of decline was modest as reduced availability of Chinese goods created favourable conditions for local businesses.

"The concern for South Korea will be how hard this is going to hit exports," Hayes said, adding domestic replacement of Chinese imports have partially negated drag in overseas demand.

A few data releases including February exports underlined the negative impact from the virus, with shipments per working day plunging, but markets fear the worst is yet to come.

South Korea's central bank kept interest rates unchanged on Thursday, but analysts say it won't be able to hold out for too long as policymakers acknowledged the threat from a prolonged virus outbreak.

While sentiment held up in the PMI survey, a separate central bank survey showed business sentiment suffered the worst fall in nearly 17 years, even without fully reflecting fears over the recent spike in national infections.

"Even if demand does recover, day-to-day operations are likely to suffer ... until normality across supply chains is restored," Hayes said. (Reporting by Joori Roh Editing by Shri Navaratnam)

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