Businesses count the cost after the havoc of Hurricane Katrina

Click to follow
The Independent Online

Two share price movements yesterday offered a microcosm of the economic impact from the carnage wrought by Hurricane Katrina.

General Motors, the world's largest car maker, saw its stock drop 3 per cent amid fears of the impact of rising fuel prices. Meanwhile shares in Aggreko, the UK company that is the world's largest supplier of portable power generators, rose as much as 7.5 per cent as traders bet it would benefit from the emergency.

There are losers and winners in the business world from even the most profound natural disasters - and it may take months to assess the net effect on the economy.

Merrill Lynch estimates a $40bn (£22bn) boost to the US economy from the reconstruction effort. But it says the costs in terms of higher energy prices could be as much as $30bn - and that's before taking account of loss of sales for companies and employees' wages.

Action Economics, a market analysis firm, cut its forecast for growth in the current third quarter by half a percentage point to 3.8 per cent because of Katrina. It forecasts the total monetary damage will be $50bn, making it the most damaging US hurricane even after adjusting for inflation.

But Rick MacDonald, Action Economics' director of investment research, warned its figures did not include any of the "extraordinary" impact on the petroleum industry. "Some fear this will cause a prolonged impact that will drag well into the fourth quarter," he said.

The US Coast Guard said 20 oil rigs or platforms in the Gulf of Mexico are missing, while officials estimate Katrina has halted 95 per cent of oil and 88 per cent of natural gas output in the area. Oil prices have broken above $70 a barrel, which will dampen world economic growth - although oil prices were rising anyway. Southwest, the low-fares airlines, said more than four-fifths of its fuel needs for the rest of the year had been hedged at an oil price of $26 a barrel.

More concerning for the economy will be the rise in prices of refined products for business and consumers. Gasoline prices surged 10 per cent while pump prices jumped 50 cents to more than $3 a gallon across the south and Midwest. CNN said one station was selling fuel at $5.19 a gallon.

Away from energy, it is easier to assess the upfront economic impact. Wal-Mart has closed 123 stores because of power problems. Delta, American, Continental and AirTran cancelled several hundred flights.

One concern is that the impact on the economy will be magnified by the fact that Louisiana, Mississippi and Florida provide niche services for the rest of the US. As well as energy, Louisiana is a national hub for grain exports, handling 40 per cent of the US output. It boasts more than 100 major chemical plants and is among the top five states for sugar cane, sweet potatoes, rice and cotton.

There is also the draw that New Orleans' rich Cajun and French heritage holds for tourists. Tourism employs 87,000 workers, supported by the $5.2bn that travellers bring in every year.

Harrah's Entertainment said its riverboat Grand Casino in the stricken Mississippi town of Biloxi had probably been destroyed. Hard Rock, the arm of Rank Group that owns restaurants in New Orleans and Biloxi, was assessing the damage.

Analysts draw parallels with the fate of Galveston in Texas, hit by a storm in 1900 that killed 8,000 people. Businesses fearful of a repeat moved inland to Houston - the rest is economic history. While food giants can get their rice elsewhere, at a cost, it is impossible to find another New Orleans Mardi Gras festival.

In the short term a million people have been evacuated from New Orleans and the toll from the wider area could take that total to 1 per cent of the US workforce.

So far the authorities have taken a sanguine view. Anthony Santomero, of the US Federal Reserve, said Katrina would "slow but not stall the forward progress of the economy".

There were already signs of recovery. Louisiana Offshore Oil Port, the US's biggest import terminal, is expected to unload its first tanker cargo since Saturday. Georgia-Pacific, a maker of wood boards, expects to resume production in two weeks at plants in Alabama, Louisiana and Mississippi. And businesses - albeit not ones in the affected south-west - will benefit from the reconstruction.

Traders were quick to pencil in the gains. As well as Aggreko, shares in a host of building materials companies enjoyed sharp gains. Shares in Lafarge of France, the world's biggest cement maker, and the UK's Wolseley, the biggest plumbing and heating supplier, rose more than 3 per cent. As Paul Niven, the head of strategy at the fund manager F&C, put it: "The net impact on US economic growth is not necessarily a negative, as the cost of rebuild will boost output in coming months."

Insurers estimate the hurricane damage at $9bn to $50bn

Insurers are still struggling to assess the cost of Hurricane Katrina, with predictions of the total damage within a range of $9bn to $50bn.

Thomas Larson of Eqecat, the catastrophe modelling agency, says it may take weeks before a clear picture emerges because of the problems of accessing the region, much of which remains under water.

While there is still a chance the final tally will be less than that of Hurricane Andrew, which cost insurers $15.5bn when it hit the Caribbean and Florida in 1992, Katrina looks certain to at least be the second most expensive natural disaster in history.

The insurers have come a long way since 1992, when many firms were much less disciplined in their underwriting and found themselves under-reinsured and overexposed to this kind of risk. For many, the blow of Andrew was enough to put them out of business.

In the past decade, insurers have become more prudent as to how they write cover in risky areas. And in Florida, the most vulnerable state in terms of freak weather incidents, the government has established an insurance safety net which ensures underwriters are adequately reinsured against this sort of disaster.

Although last year saw the worst storm season on record, collectively costing more than $22bn, many insurers managed to turn strong profits for the year - a clear illustration of the industry's maturity.

There is no doubt that Katrina will hit the industry harder. Even if the total losses are less than in 2004, Louisiana and Mississippi do not have the same insurance arrangements as Florida, and many reinsurers and insurers could find themselves taking a hefty blow.

Such fears sent shares in many of London's insurers, including Amlin, Catlin and Wellington, down sharply yesterday.

But even at the worst end of forecasts, the industry is probably capable of bearing the cost of Katrina. With several weeks left of this year's season, the real worry now is what comes next.

Another major storm on the US mainland this autumn - which is by no means out of the question - could well bring the industry to its knees again.

James Daley

Comments