By John Richardson
EARLIER THIS month I provided you with a ten-point guide for the impact of coronavirus on the petrochemicals industry. There have been many, many changes since then. Here is the latest version:
- The number One priority is employees and their well-being. Their psychological and emotional as well as physical needs will be constantly changing, with so many challenges in these areas that we haven’t even thought about it. For non-operational staff, homeworking is the New Normal and will probably last for most of the rest of this year. On the operational side, keeping workers safe from infection is critical – both from the human perspective and from the business continuity angle. It would only cause one infected worker to force companies to shut down a whole steam cracker and its derivative plants.
- You heard it here first here. It was clear from early February that because of the extent of the downturn in China, a V-shaped recovery was never on the cards even assuming that the problems were confined to China. Now that the virus has spread overseas this will make the extent of the slowdown in China much worse. The problem had been China’s inability to supply the world; now it is lack of demand from the rest of the world for Chinese manufacturing.
- A 15 March FT article wrote: The data suggest that China’s gross domestic product contracted by 13% during the first two months of the year, according to Capital Economics. This is THE MOST important number relating to China. This would represent the lowest Chinese growth since the Mao era. This estimate tells you it would have been impossible for China to get anywhere close to its official GDP growth target for this year, even if the crisis had not gone global. This makes it very likely, in my view, that China’s petrochemicals and polymers growth across all products will be negative in 2020 over last year. I believe that demand will also be well short of earlier forecasts for this year.
- ICIS data show that China’s polypropylene ((PP) production was down by 14% in February month-on-month. This is in line with a 13.5% fall in overall industrial production in January and February. Polyethylene (PE) production was only down by 6% on a month-on-month basis. This is an indicator of what I first highlighted during the first week of February: Demand for some grades of PE is being supported by the virus through, for example, extra demand for high-density PE injection and linear-low density film grades for delivering food to people’s homes who are under quarantine. Panic buying of food and other daily necessities will have also bolstered short term Chinese demand for all the polymers that go into packaging. But the release of Chinese import and export data for PE and PP for January-February has been delayed until later this month, so these production numbers need to be treated with some caution (apparent demand in China equals net import plus local production).
- This is a link to the next theme: The extent to which virus-related demand will have bolstered global Q1 sales of polymer companies that sell into single-use packaging applications because of panic buying of food and other necessities. This is just a giant temporary effect of stock building followed by destocking and does not represent a real, sustainable rise in consumption. We need to think of two scenarios for how this stock building will play out:
- Scenario A: The crisis outside China is brought under control in Q3 this year. Panic buying stops and demand for packaging materials declines. It will then become clear the extent to which polymers demand has been lost elsewhere due to the cancellation and postponement of conferences and concerts, and what seems likely to be no July-September summer holiday season this year in the West – along with the collapse of consumer confidence and the inability of people to go out and spend.
- Scenario B: The crisis rumbles until at least the end of this year. We will then see several cycles of rising and falling demand for food and other daily necessities and thus the packaging needed for these products. Each of the bumps in demand will be shallower and shallower as the demand for packaging from stocking up on food is offset by constantly rising losses in consumption resulting from the declines in other economic activity (Note that as quarantine measures spread across the West, future cycles of stock building would be done online. An early sign of the benefits to online retailing was Amazon’s announcement that it will take on an extra 100,000 employees in the US. But, sadly, the job gains in online retailing will be more than cancelled out by job losses at bricks-and-mortar shops).
6. Now that the epicentre of the crisis has moved to Europe, an important starting point for re-assessing demand is what happened during the Global Financial Crisis. Will consumption fall by less than in 2008 and 2009 or more than during those years? If the above Scenario A occurs, then the declines in demand might just be less than in 2008-2009. If Scenario B happens the falls in demand will have to be worse. I fear that Scenario B is almost certain to happen.
7.) Supply chain disruptions are going to get worse and worse until the global crisis is resolved. This will add to volatility and uncertainty around pricing, margins, supply, demand and export and import flows.
- Many containers will be stuck in the wrong places, unable to find cargoes to move to where they are needed to then move other cargoes. Shipowners will not move empty space at a time when they are facing major losses.
- Containers that do have cargoes will be stuck in ports unable to move because customs officers won’t be at work.
- Containers that are in the right locations to receive cargoes and can be cleared by customs officers will not be loaded because of either shortages of dockers to load containers or shortages of truck drivers to move cargoes to ports.
- There will be shortages of space on some routes because owners will be forced to cut back on capacity in order to reduce their losses.
- Costs will rise where space can be found, making some shipments unviable.
8.) Stock markets are going to continue to bounce around with big daily losses and gains as sentiment ebbs and flows. The cycle will continue to be: More bad news emerges on the virus, sending markets down and then more stimulus is announced, leading to big rallies. This was the same pattern in 2008-09 until the markets eventually bottomed out. Some good news that the US now taking this very seriously with a trillion dollars’ worth of stimulus – up from just $50m a few weeks ago. Events are moving so incredibly fast. The bad news is that we still don’t know if stimulus will be that effective because of all the lost economic activity. Even putting money directly in people’s pockets, which is a feature of the latest US stimulus, might not work as concern about the future may result in the money being saved.
9.) I am afraid there is no doubt that we are already in a global recession that will surely last until at least the end of this year . There also remains a substantial risk of a financial crisis because of the scale of corporate debt
10.)Nearly all the focus has been on the spread of the virus to the developed world. But not much attention has been paid to what would happen if the disease took real hold in very poor countries with poor healthcare systems. This could set emerging markets growth back several years – and thus petrochemicals demand growth as it is the emerging markets that are the main driver of growth. Plus, there are any number of social and political problems that you can imagine if coronavirus were to get out control in say Africa.