INSIGHT: Coronavirus to hit global chemicals demand

Author: Joseph Chang


NEW YORK (ICIS)--The coronavirus outbreak in China will hit global chemicals demand as local governments extend Lunar New Year holidays and manufacturing plants and retail outlets shut down.

Production and trade in China’s petrochemical industry will be disrupted following extensions of the Lunar New Year holiday period as the country struggles to contain the deadly epidemic.

Initial optimism about a post-holiday recovery in demand was quashed as the death toll from the novel coronavirus 2019-nCoV believed to have originated in Wuhan city continues to climb.

It appears this strain of coronavirus is less deadly than SARS, which also originated in China in 2003, but more contagious. Ultimately, the impact on China’s economy and the global economy could be greater.

“So far, it looks like the mortality rate from the Wuhan coronavirus is much lower than that of SARS or MERS, and the Chinese government’s response has been much quicker than during the SARS outbreak,” said Credit Suisse analysts in a 28 January report.

“Nevertheless, the strong reaction by the Chinese government (including travel bans and an extension of the holiday period) and the fact that the virus can be transmitted before symptoms appear could result in a bigger impact on the Chinese economy than SARS,” they added.

China has extended the week-long Lunar New Year holiday, which was supposed to end on 30 January, up to 2 February. But in some key cities, the holiday was extended further.

In the key manufacturing hubs of Shanghai, Jiangsu, Zhejiang and Chongqing, local governments have extended the holiday by a week to 9 February. In Hubei province, where Wuhan resides, it was extended to 14 February.

Production at local factories is highly vulnerable given heavy reliance on migrant workers, who would not be able to return immediately to work amid travel bans implemented as a precaution against the spread of the coronavirus.

"Business in Q1 in China will be slow. Many factories will not operate for a number of weeks. Raw material consumption will be down - oil, naphtha, ethylene, propylene, styrene monomer, MEG (monoethylene glycol) just to name a few. Also domestic production will be down - this will impact imports but also exports," said an Americas-based trader doing business in Asia.

Polyvinyl chloride (PVC) should be less impacted as market tightness could mitigate lower demand in China, the trader said,

US-based General Motors (GM) will keep its auto plants in China shut down through 9 February as will Japan-based Honda for its motorcycle plants. US-based Tesla has also halted auto production at its brand new “Gigafactory” in Shanghai, anticipating a one to one-and-a-half week delay in the ramp-up of its Model 3 sedan.

Sweden-based furniture retailer Ikea on 30 January announced it is shutting down all its 30 stores across China.

The coronavirus is another blow to China’s manufacturing sector already weakened by a prolonged trade war with the US.

China GDP growth in 2019 slowed to 6.1%, the slowest pace of expansion recorded since 1991.

Shipping restrictions at selected local ports, including Changjinkou and Lianyungang, as well as some terminals in Guangzhou, are in place, disrupting cargo flows in and out of the country. Normal operations at these ports are expected to resume in mid-February.

Consequently, cancellations of petrochemical cargoes in Asia were noted this week for northbound and various intra-northeast Asian routes.

It’s worth noting that China is far more important to the global economy than it was during the SARS epidemic of 2003. In 2003, China accounted for 4.3% of global GDP. This has now ballooned to 16.3% today, the Credit Suisse analysts pointed out.

Ultimately, Credit Suisse estimates the coronavirus could temporarily take 1.5 percentage points off China growth and at least 0.2 percentage point off global GDP growth, but expects that much of the impact would be mitigated by China further easing monetary and fiscal policy.

“Although China has a fiscal deficit of 12.7% of GDP according to the IMF after taking account of off-balance sheet liabilities, the augmented debt-to-GDP ratio is only estimated to rise to 101% by 2024 from 80% this year,” said the Credit Suisse analysts.

“This is still well below those of many countries and China is a net creditor nation, suggesting China can easily afford to print more money,” they added.

However, while China may well pull its policy levers, the scale of stimulus is likely to be far less than the massive response to the financial crisis of 2008-2009.

“China might be able to get its debt problems under control over the next few years, but it simply cannot return to the scale of old-style huge economic stimulus that created the debt problem in the first place – otherwise, of course, it would be back to square one on debt. So there will be no return to the levels of economic stimulus that we saw in 2009-2017,” said ICIS senior Asia consultant John Richardson.

Richardson estimates the hit to China polyethylene (PE) demand from the combination of its single-use plastics ban, and the impact of the coronavirus could be around 4.1m tonnes.

Dow CEO Jim Fitterling on the company’s Q4 2019 earnings conference call on 29 January said the coronavirus outbreak “feels like” what happened during the SARS period.

“Once we figure out how to treat this, things will start to return to normal. And I think for SARS it took us a few weeks for WHO (World Health Organization) and CDC (Centers for Disease Control) to figure out how to treat it, and then everybody started to get back into normal life,” said Fitterling.

For now, he noted demand pull in chemicals for household cleaners and disinfectants, as well as nonwovens for masks and wipes.

Axalta Coating Systems CEO Robert Bryant said the primary immediate impacts of the virus on the company would be from logistics in China.

“Roads in and out of some of the major cities are closed, and the impact on product movement, shipping and inbound raw materials is not yet clear,” he said.

Many of Axalta’s light vehicle customers have pushed out production schedules by between one to three weeks, and many car dealers are expected to remain closed until well after the Lunar New Year holiday season, he said.

Along with coatings, other materials with meaningful exposure to the automotive sector include polypropylene (PP), styrene butadiene rubber (SBR) and polycarbonate (PC).

Additional reporting by Pearl Bantillo, Bill Bowen, Yaw Min Jie, Jasmine Khoo, Yuanlin Koh, Izham Ahmad, Nurluqman Suratman, Jackie Wong, Judith Wang, Clive Ong, Helen Lee, Melanie Wee, Keven Zhang and Stefan Baumgarten 

For more related stories and information, visit the Coronavirus Topic Page.

Insight article by Joseph Chang and Pearl Bantillo

Thumbnail image by CHINE NOUVELLE/SIPA/Shutterstock