INSIGHT: Hopes of V-shaped recovery fade as pandemic resurges

Author: Will Beacham

2020/08/07

BARCELONA (ICIS)--With the second half of the year now fully underway, there are signs of an economic rebound from very depressed levels.

But optimism for a V-shaped recovery is fading as governments struggle to contain the resurgent coronavirus pandemic.

Medical officers in France and Spain warned on Tuesday that a second wave of infections is very likely, and may already be underway in Germany.

In the UK, more local lockdowns have been imposed in the north of the country while Spain also has local restrictions in place.

In Asia-Pacific, there are new lockdowns in the Australian state of Victoria while in the Philippines more than 27m people have been put back into lockdown around the capital Manila.

Meanwhile, the US continues to see rising numbers of cases and deaths, with the focus shifting from northeast to the south and west; political stalemate has seen more than 30m people lose $600/week in extra payments end from 1 August.

Latest data from the American Chemistry Council shows a small uptick in global production in June, driven by China, but from a steep contraction. Production is now at 2016/17 levels.

Click on the image to make it larger.

MANUFACTURING EXPANDS
New Purchasing Manager Indices (PMIs) for July give cause for optimism, showing industrial expansion across all regions, but still far from a recovery to pre-pandemic levels.

Eurozone manufacturing recorded growth in July, breaking the 18-month trend of contractions, according to IHS Markit Economics; the manufacturing PMI rose to 51.8 for the month.

Job cuts continued in July, however, which could pose a risk to the medium-and long-term economic recovery.

With furlough schemes winding down in Europe and the US there is a risk of a big jump in unemployment as companies are forced to shed staff.

Eurozone business confidence for the next 12 months continued to rise on the previous month’s levels to its highest level since January, which could pave the way to a steady economic recovery, a view supported by analysis from Oxford Economics.

The group expects industrial recovery to be only gradual, as disrupted supply chains get back up and running, and demand and capacity utilization slowly return to the pre-pandemic levels.

“We expect eurozone industrial production to return to end of 2019 levels only by the end of next year,” said Oxford Economics.

US manufacturing activity expanded again in July, with the overall economy growing for the third straight month, the Institute of Supply Management (ISM) said on Monday.

Caixin's general manufacturing purchasing managers' (PMI) index for China rose to 52.8 in July, from 51.2 in June, with output and total new orders both hitting their highest levels since early 2011, the Chinese media firm said on Monday

Output expanded for the fifth month in a row in July, with many companies citing greater client demand amid a further recovery in market conditions following the coronavirus outbreak. However new export orders remained in contraction for the seventh consecutive month.

V-SHAPED RECOVERY: BASF BULLISH ON CHINA
BASF was candid last week about its inability to make an earnings forecast for this year because of the “extreme scenario” caused by the pandemic.

CEO Martin Brudermuller said that 80% of the company’s customers are only placing orders two months ahead: order are for low volumes, with customers working hand to mouth.

He said the only country showing signs of a V-shaped recovery is China, with this driven by increased production rather than demand.

China’s government can tell companies to resume production, even if downstream demand is not strong.

“The customer confidence index is partially declining, while production is going upwards,” said Brudermuller.

Because of the prospect of sustained lower demand, BASF is considering further impairment charges on its assets to decrease their value on the balance sheet.

The company recorded  a second quarter net loss of €878m due to an impairment charge in the company’s Wintershall oil and gas assets, as crude oil prices collapsed during the period.

Austrian chemicals group Borealis, meanwhile, sees no sign of a V-shaped recovery and has pushed out expectations of a return to pre-pandemic levels only beyond 2021, according to CEO Alfred Stern.

Belgium’s Solvay also published financial results last week with an 18% fall in second quarter sales.

The company is not anticipating a quick recovery, with the third quarter on track to remain at a similar level to the second, with only modest recovery anticipated in the fourth quarter this year.

Meanwhile the CEO of Swiss specialty group Clariant, Hariolf Kottmann, believes the worst is yet to come.

“We do not believe in a V-shaped model of recovery following the coronavirus. Full guidance would be unprofessional, but we think that the third quarter will be weaker than the second quarter,” he said.

Underlying net income in the first half of 2020 was 31% lower than the previous year due to lower demand, volumes and negative currency effects.

AUTOMOTIVE, AEROSPACE WEAKNESS
BASF and Solvay suffered from weakness in important end use markets such as automotive, construction and aerospace.

There are now signs of improvement in construction, at least.

ICIS reported improved activity in Europe’s construction sector, with demand for polyvinyl chloride (PVC), for example, rising significantly with France and Northwest Europe seeing above average usage.

Demand in the UK is still below typical levels.

PVC demand is also improving in the US, with an outage contributing to very low inventories, according to analysts at Chemical Data (CDI), which was acquired by ICIS in July.

The group also reported record demand for polyethylene (PE) for packaging in the US.

However, the outlook for automotive is less optimistic, with few signs of any pick up in demand for chemicals serving this market around the world.

DEMOGRAPHICS PUT CAP ON ECONOMY
International eChem chairman, Paul Hodges, and ICIS senior consultant for Asia, John Richardson, argued in Monday’s ICIS weekly chemicals podcast that demographics are already reducing economic growth around the world.

They said ageing populations in western and even emerging economies are a drag on economic growth, with much of future global population growth occurring in that segment of the population.

The 55+ age group have lower incomes once retired and tend to spend less, especially on big-ticket items such as autos and electrical goods.

The pandemic now adds another drag on economic growth, they say, meaning demand may never return to pre-pandemic levels.

"You’ve lost whole industries here which haven’t become apparent because of the furlough system. No-one in the airline industry is expecting that to return before 2024-2025.”

They also highlighted the collapse in use of public transport, commercial property, shopping malls and the hospitality sector.

“I don’t think we will get back to where we were for the long term because the nature of demand is changing. People are working from home, owning less cars and flying less," said Richardson.

"The immediate damage to the economy could take a generation to fix."

Hodges argues that the whole business model of the chemical industry, which has worked fantastically for the last 40-50 years, is now finished.

“We will never get back to 'business as usual' if we don’t have the wealth creators in the 25-54 age group," said Hodges.

"The chemical industry has to become more service and solution-orientated by enabling mobility rather than supplying cars, for example.”

Front page picture: People wearing face masks in Ankara; infection rates are rising across Europe
Source: Chine Nouvelle/SIPA/Shutterstock

Insight by Will Beacham