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Main Street versus Wall Street and the crisis in the developing world

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By John Richardson

RISING equity and oil markets do not necessarily point to a V-shaped recovery. I know I’ve said this on several previous occasions, but it is critically important that petrochemicals companies and their customers see through the fog. I therefore need to re-emphasise the risks ahead.

This useful article from The Guardian presents three scenarios for progress out of lockdown. One is that we have reached the peak of infections with minor rises in the number of new cases from now until 2022. The second outcome is where the peak is still ahead of us and the third is where the number of new cases just about flatlines over the next two years – in other words, we are already out of the crisis.

A lot will depend on the science of the disease that the scientists do not fully understand. Is it more lethal or less fatal than other illnesses? Do we already have herd immunity or is herd immunity a long way off? Do we have to wait until a vaccine is available and has been produced, distributed and injected in billions of doses before we are out of the woods? Is a vaccine even possible?

Take the three graphs in The Guardian article and one could almost plot oil and petrochemical prices along the paths of the graphs. Under the first outcome, we would see a lot of small peaks and dips in pricing from now until 2022. The second outcome suggests a big run-up in pricing and then a major collapse as the peak in new cases is still ahead of us. As the third result would see no more peaks and troughs of any dimensions, this suggests much lower price volatility.

And yet, as I keep saying, one would have thought from recent events in equities and oil that the worst of times is definitively, without doubt, behind us.

But please consider that US stock market rallies don’t necessarily equal an improvement on Main Street. Before the 2008-2009 financial crisis, 62% of Americans said they owned equities, according to Gallup. This has fallen to 55% in 2020.

The percentages owning stocks range from highs of 85% of adults with postgraduate education and 84% of those in households earning $100,000 or more to lows of 22% of those in households earning less than $40,000 and 28% of Hispanics. Could the recovery add to income inequality and social unrest if it continues to mainly benefit the rich?

Last Friday’s release of more positive US jobs numbers for May led to a press conference by the president in the Rose Garden. It first appeared as if the headline unemployment rate had fallen to 13.3% in May from 14.7% in April. First reports suggested a gain of 2.5m jobs.

It has since become clear that the headline numbers didn’t take into account furloughed workers. The real unemployment rate was three percentage points higher – an extra 4.9m people unemployed in May, according to the US Bureau of Labor Statistics.

One of the problems of the 24-hour news cycle is that it is very heavily weighted towards coverage of the West where testing and tracing systems have greatly improved since the crisis began. Healthcare systems are now also less stretched than a few weeks ago.

But inadequate healthcare and tracing and testing systems in the developing world mean we have no clear idea about the number of infections and deaths across the region. It could also be that lockdowns have been eased too early in poorer countries because of the need to get “day rate” labourers back to work so they can feed themselves and their families.

The pandemic will push a further 100m people into extreme poverty and result in emerging and developing economies shrinking for the first time in 60 years, says the World Bank.

The levels of complexity are on a scale we have never seen before. Here is some more complexity for the petrochemicals business:

  • Will autos demand remain depressed for at least the rest of this year or will government “cash for clunkers” programmes (government incentive schemes to encourage people to trade in their old cars) result in a big recovery in demand? (Note that autos demand will recover as it could hardly get any worse. In the UK, auto sales year-on-year were down by 97% in April and so the May onwards data must be better as car showrooms gradually re-open.
  • One would intuitively think, though, that the cheaper durable goods – rather than the “big ticket” items like autos – will see a quicker rebound. But in value chains such as textiles and garments, lack of visibility on inventories makes it impossible to assess how much “new demand”, as opposed to running-down stocks, will be created. And as I said, government incentive schemes may boost other auto and other big ticket petrochemical end-use markets.
  • How much might “seize the day” buying trends drive the recovery? As most of us have been stuck at home for months, the relief from boredom of being able to shop may result in as sharp rise in discretionary spending. However, what about the huge loss of jobs and incomes?
  • This brings us back to the role of governments. The speed and effectiveness of government stimulus programmes is critically important. Government spending will have a major – and I think defining – bearing on the speed and pace of the recovery in consumer markets.

All of us are of course hoping for a V-shaped recovery. But be prepared for something very different.

Please also note that most people I have spoken to expect no recovery in all the lost petrochemicals and polymers demand until 2023 at the earliest. In other words, it seems likely to be at least two more years until demand is back where it was in 2019. Petrochemicals and polymers demand are a great barometer for the broader economy. When equity and oil markets wake up to this reality, downward corrections seem very possible.