Europe economic collapse adds to global chemicals woes

Author: Will Beacham


BARCELONA (ICIS)--New figures which show Europe’s economy is collapsing confirm fears that the world is heading for a deep recession as some chemicals markets have already suffered severe demand shocks.

The question is – how deep and how long will the recession be?

The eurozone's March PMIs published this week by IHS Markit, measuring both services and manufacturing industries, suggested the region’s economy is contracting quickly, with the headline figure plunging to an unprecedented 31.4 points in March, down from 51.6 points in February.

Any number below 50 indicates contraction.

As more cities and entire countries go into lockdown mode, much economic activity is being severely curtailed or even grinding to a halt.

In the US, more than 3m people filed for unemployment benefit last week, compared with 282,000 the week before.

The UK's figure was 477,000 in the last nine days.

Europe’s automotive sector is at a standstill; Italy has imposed further restrictions placed on non-essential manufacturing activity.

Moves such as this are likely to curtail economic activity further as other countries adopt similar measures, and further PMI falls are likely in coming months, especially in countries which have not so far faced heavy restrictions.

Disruptions to manufacturing supply chains are making matters worse.

Initially, this was caused by a shortage of parts produced in China, but has now spread to regional supply chains too.

While some factories are being closed because of a collapse in downstream demand, others lack of personnel.

In chemicals, ICIS this week reported that Arkema has stopped production at its Carling, France acrylate esters plant, due to constraints in key operating personal, linked to coronavirus and other constraints.

According to Oxford Economics, the eurozone is heading for a 4% fall in GDP in the second quarter, the sharpest in history.

For the whole of 2020, the group forecast contraction of 2.2%, based on a relatively quick rebound in the second half of the year as social distancing measures are lifted and the benefits of monetary and fiscal stimulus kick in.

However, the analysts were candid in admitting: “The unprecedented nature of this crisis means that uncertainty around our forecasts is extraordinary.”

Its forecasts assume the maximum impact in March and April, with recovery accelerating towards the end of the year.

After China, South Korea, and Europe, lockdowns are spreading elsewhere in Asia and the US, with dire consequences for the global economy.

India, with a population of 1.34bn, went into lockdown this week for a period of 21 days, and ports and petrochemicals plants have already been forced to close.

Polyolefin producers have halted domestic dispatches on request from processors due to manpower shortage, following the government’s stay-home order, which will inevitably lead to shutdown of factories.

In the US, which has lagged behind Europe in imposing lockdowns, restrictions are now being imposed state by state, with increasing impact on economic activity.

Large chunks of the country’s automotive sector have ceased production, and construction projects are being delayed or shut down as a result of government restrictions, labour shortages, or logistics snarls.

S&P Global Ratings forecast on 24 March a “massive hit” to world economic growth caused by the coronavirus, predicting a decline in US GDP of more than 12% in the second quarter, with a similar decline for Europe.

It expects double-digit declines in GDP to occur in emerging markets such as Brazil, India and Mexico, which are the last group to be hit by the pandemic.

The US credit ratings agency is working on an assumption that the pandemic will peak between June and August, with containment measures pushing the global economy into recession and potentially causing defaults among non-financial corporate borrowers.

On 25 March alone, S&P issued 49 press releases downgrading or placing corporates across many sectors on credit watch.

In chemicals, it included BASF, Atotech, Pfizer, Borealis (due to a change in shareholder) and Occidental Petroleum.

Oxford Economics’ new forecasts make grim reading. On 20 March, it revised down its 2020 forecast for global GDP growth of 2.5%, published in January, to 0% with a downside risk of a contraction of 1.3%.

"The spread of the coronavirus to more economies, the imposition of social distancing across most of the western world, plus ongoing financial market turmoil despite heavy central bank intervention, lead us to make further significant across the board cuts to our 2020 GDP forecasts,” it said.

Its baseline forecast assumes a bounce back towards the end of 2020, with stimulus and resumption of activity accelerating quickly.

The group sees considerable downside risks to its baseline forecast because of three factors:

- The duration of the current outbreak and potential for further waves and more restrictions

- The risk that policy makers will not be able to limit market panic

- Possible long-term effects on the behaviour of firms and people

In the downside scenario, there could be a deeper, longer recession in which more countries suffer even worse effects that would longer lasting, while the financial markets spillovers are greater than in the current baseline.

In the downside scenario, the global economy would be on course to contract by 1.3% in 2020.

Global chemical production in February fell at an accelerated pace from January, led by a large decline in China and other countries because of coronavirus, the US trade group the American Chemistry Council (ACC) said in its Global Chemical Production Regional Index (CPRI) report.

There are hopes that a recovery in China – the first country to go into lockdown – can be repeated elsewhere as restrictions are lifted graduall across the country.

It was due to remove travel restrictions placed on Hubei province from 25 March, with the exception of Wuhan, the coronavirus epicentre, official state news agency Xinhua said on Tuesday.

S&P estimates China’s GDP contracted by 13% in the first quarter but should begin to grow again in Q2.

China has a very export-oriented economy, so a slowing global economy will hurt activity there.

However, according to US credit rating agency Fitch, economic activity should be close to normal by the end of March.

As of last week, about 50% of affected small- and medium-sized enterprises (SMEs) outside of Hubei province have resumed operations and about 95% of the larger firms are already up and running, said Fitch, citing Chinese government data.

As of 20 March, close to 90% of more than 10,000 key infrastructure projects outside Hubei have resumed construction.

The picture is mixed for China’s petrochemicals sector, however, with 24 plants restarting, but 21 shutting operations between 20-26 March, according to a survey of ICIS news plant updates.

ICIS has reported lower port inventories for xylene and toluene in east China, although styrene monomer inventories rose.

Coronavirus means the chemicals industry could face a severe demand shock larger than in the 2008-2009 financial 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, according to John Richardson, ICIS Senior Consultant, Asia, and Paul Hodges, chairman of International eChem.

“This is unchartered territory. It could be the biggest demand drop since the end of the Second World War, when GDP fell by 25%," said Hodges.

"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.”

Financially, chemical companies must focus on cash and debt to weather this storm, according to Hodges, making sure both customers and suppliers are solvent and also keeping costs 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 ethylene demand will be lost.

Front page picture: A market in India, closed this week after the world's largest stay-home order was issued, affecting the country's 1.34bn residents 
Source: Farooq Khan/EPA-EFE/Shutterstock

Focus article by Will Beacham

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