BARCELONA (ICIS)--Coronavirus means the chemicals industry could face a severe demand shock larger than in the 2008-2009 crisis when operating rates fell to 46%, according to two consultants.
A massive loss of demand around the world for key end use sectors such as automotive, construction, and electronics, leaves chemical companies facing tough choices to maintain their businesses, said John Richardson, ICIS Senior Consultant, Asia, and Paul Hodges, chairman at International eChem.
Government and central bank actions to boost demand and safeguard economies have so far failed to reassure investors, leading to further falls in stock markets and oil prices on Monday.
Because of coronavirus, stimulus actions in 2020 will not be as effective as in the financial crisis, said Richardson.
“You can’t stimulate nothing – the economic activity just isn’t there. The size of the demand shock is enormous."
NEGATIVE OIL PRICE?
Some commentators suggest oil prices could turn negative, meaning suppliers would pay customers to take it off their hands.
“My forecast is for $10/bbl oil, but quite sensible people are saying to me that if there is no driving and not a lot of freight or jet fuel demand, tanks will be full," said Hodges.
"If you want to store oil in April or May you will have to store it on a ship: if it’s going to cost $10/bbl to store it could be cheaper to offer a customer $5/bbl to take it away.”
He added the world economy had never faced a scenario with no demand at all, and analysed what it could mean for crude oil prices.
"People are sitting on very high-priced inventory all down the chain. When oil prices fall, there is always destocking.”
PE RE-STOCKING IS NOT REAL
Richardson believes that current polyethylene (PE) demand for food packaging linked to panic buying cannot compensate for the massive loss of demand across all value chains as economic activity comes to a virtual standstill across the world.
“Stocking up is not real demand. It will be worse than 2008-2009, with deeply negative growth. Low oil prices make the US ethane investments look very shaky. Projects will be cancelled and we have to get used to much lower demand," he said.
Hodges added: “This is unchartered territory. It could be the biggest demand drop since the end of the Second World War, when GDP fell by 25%.
"A big recession like this with paradigm shifts going on could take 10 years to recover. 2008-2009 was a dress rehearsal for today - by December 2008 the industry operated at 46% capacity.”
Chemical companies must focus on cash and debt, according to Hodges.
You must ask if both your customers and suppliers are solvent and make sure your own costs are under control.
Under Richardson’s latest estimates, published on his blog Asian Chemical Connections, global ethylene demand under a best case scenario could fall by 30m tonnes from 2020-2022 compared to pre-crisis forecasts.
Under the worst case scenario, 71m tonnes of demand will be lost.
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