The US sub prime crisis taught us that markets are integrated and risk is global. The term used was “systemic risk” as the system was at risk and the economy came close to a melt down.
So, could the prolonged volcanic Eruption of Eyjafjallajokull in a remote part of Iceland provide a similar systemic risk and melt down (not literarily of course!) to some economies and business?
One of the effects, natural events can have is on the supply chain. In a global distributed world, consumable goods are manufactured across the globe and shipped “just in time” to the distributors and manufacturers by air, water or on the ground.
Cargo flights being stranded for a prolonged period of time can have severe effects on sovereigns, business and financial markets.
For exporting countries and businesses, an abrupt reduction in customer demand and the need for additional storage, that’s if the over capacity can be stored.
- For importers, the disruption to the manufacturing chain due to the lack of one component which can bring production to a halt or for chain stores unable to deliver fresh produce.
- Airline companies to lose daily revenue, as do the support infrastructure companies delivering daily goods and services.
- For insurances the risk of possible huge claims and payouts, if the event is covered.
- Etc…
Media news provided the following examples during the recent volcanic eruption:
- Hundreds of thousands of Kenyans working in agriculture, the country’s largest export sector, could face economic uncertainty because of the flight bans.
- Japanese car giant Nisan, says it is suspending several production lines due to shortage of part from Ireland.
- Refrigerated stores at Nairobi airport and on farms are completely full, whereby a huge amount of fresh flowers and vegetables destined for the European market is in danger of perishing.
- The Airline Associated calculated combined Airline losses for 740m Euro in the first 5 days of Air travel ban.
So, supply chain risk can be classified as another systemic risk, hard to measure or forecast and could severely impact in the short or longer term capital markets, securities portfolio’s, company profits or heavily geared organisations.
