INSIGHT: Europe chemicals unfazed by lockdowns but second wave's virulence dents confidence

Author: Tom Brown


LONDON (ICIS)--A second wave of the coronavirus pandemic is touching all corners of Europe, with the east hit hard and lockdown measures implemented across the board as the only way to protect health systems from collapse.

The renewed rapid spread of the virus even threatens now the health system in Germany, a country widely praised so far for its test-and-trace system which had kept cases well under those elsewhere in the eurozone.

Germany, with a population of 80m, has a one-month partial lockdown. Chancellor Angela Merkel spoke of a “dramatic situation” in hospitals if the curve of infection is not brought under control.

The second largest economy in the eurozone, France, also entered into lockdown this week, for one month, while Italy and Spain have implemented curfews and other measures to restrict social contact.

How the new restrictions to mobility will affect the petrochemical industry remains to be seen, but some unfazed sources said it is business as usual or even better than average for the time of the year.

This would be in line with flash PMIs (purchasing managers indexes) measuring economic activity published earlier on Monday. In October, service sectors were contracting but manufacturing kept booming as global trade recovered.

It is worth noting, however, that while output in manufacturing increased, employment decreased and that does not bode well for the medium-term economic outlook.

For the moment, however, sources trading and producing petrochemicals are also reporting an unusual fourth quarter, a period usually in which destocking reigns as firms rush to finalise annual accounts.

A plasticizers seller in northwest Europe described demand as “still very strong” although it conceded that sentiment has turned negative as restrictions are gradually introduced while the infection curve keeps rising.

“Measures [to limit mobility] are being increased everywhere in Europe [and] people get a bit weary of them. However, this is not impacting our orders yet: they are still coming in, and we are seeing very strong demand from derivatives,” said a Switzerland-based oxo alcohols seller.

The rapid expansion of the second wave, however, is causing trouble at production plants, where plenty of workers are testing positive, requiring them to isolate for two weeks.

The eurozone’s 19 countries were in recession in the first and second quarters of the year, but bounced back strongly in the third quarter as reported by Eurostat.

But with the new restrictions likely to hit confidence, and subsequently consumer spending, a recession is back on the cards as analysts update their forecasts for the fourth quarter, with the blip potentially running into the first quarter of 2021.

Oxford Economics analysts said last week that they are to revise their fourth-quarter GDP forecast, likely to turn negative now from the previously expected 1.2% growth quarter on quarter.

With longer supply chains and inventory to work down, the revival of the manufacturing sector had lagged services, but is proving more resilient to the social anxiety that has spread across the continent.

Consumer spending on goods has proven more resilient than that on services as income that would have been spent on travel or nightlife is spent on products and home improvement.

This has led to durable goods being one of the success stories of the third quarter for chemicals producers, with BASF CEO Martin Brudermuller, echoing reports from LyondellBasell and Celanese in the US and Dow’s Sadara facility in the Middle East.

Automotive sector demand is also improving as consumers start to buy again, while vans are pushing up commercial vehicle demand, and construction gradually recovers.

In northwest Europe, the Benelux region is also in a precarious state, with the Netherlands announcing restrictions and warning that full lockdown will be reintroduced if daily infections do not fall below a certain level.

A chemicals buyer in Belgium reported starting to turn down orders due in part to how many employees were off sick. The country has also announced stronger measures, such as the closure of non-essential businesses, and mandatory home working.

Changes in purchasing behaviour during the pandemic have led to smaller, more frequent orders as a means of mitigating future demand uncertainty. BASF reported that 80% of its current orders are for the next two months, and almost no visibility beyond that.

So far, producers are largely reporting that the increased momentum seen in the latter half of the third quarter has continued into Q4. Deman through November indicated that that uplift is set to continue through much of the rest of the year.

French premier Emmanuel Macron has taken dramatic steps to stem the spread of the virus, shutting down businesses, banning household mixing and mandating an hour of outside time per person within a kilometre of their homes per day.

Paris was gridlocked on the evening of Thursday 29 October with inhabitants seeking out family homes and country dwellings to wait out the lockdown.

The move was the first full concession among EU lawmakers to the ferocity of the second wave, after widely-expressed hopes of not repeating the economic collapse of the second quarter.

To be introduced on Monday 2 November, Germany’s “lockdown light” is also a drastic escalation of restrictions, but with fewer ramifications for industrial producers so far. Bars, cinemas, theatres and gyms are to close, and restaurants will be restricted to a collection service. Shops will be restricted to one customer per 10 square metres.

The measures will further damage an ailing service sector that was the primary driver between weakening business climate numbers from Ifo, a development heralded by ING analysts as “the end of the rebound”, but that gloom belies the resilience so far of manufacturing.

The UK had introduced a three-tier system, the most severe of which was far lighter than measures seen in Germany or France.

But the o move was short-lived and UK government quickly changed course announcing a new lockdown for England set to last four weeks from 5 November. Other countries in the Union, Wales and Scotland, have different measures in place.

Scientists reporting to the government had set out a “reasonable worst-case scenario” pointing to nine weeks of 500 daily deaths or more, without necessarily hitting the peaks of over 1,000 deaths per day seen in the first wave.

Even that grim picture was based on assumptions of 12,000-15,000 cases per day in October, rather than official figures of around 25,000 cases a day by the end of the month and estimates of 50,000-70,000 daily cases.

The UK government’s earlier reluctance to adopt more sweeping restrictions could have been due in part to another upcoming storm, its departure from the EU customs union in the New Year.

Depending on the efficacy of the new lockdown measures, the country is likely to be facing the most substantial disruption in decades at what could be the peak of the pandemic.

The UK's chemicals trade group the CIA had not responded to a request for comment at the time of writing.

Producers in the UK are already noting reduced demand from Europe.

“Better to export to Brazil [or] US… three or four weeks it has been like this,” said one local player. “We sell the odd bits and pieces, nothing that makes it worthwhile.”

Spain's parliament had approved a six-month state of emergency; while authorities had shied away from imposing a full-on lockdown after the measures taken in the Spring caused a sharp economic contraction. The main measure is a curfew after 11pm.

Hospitals are still coping with the high levels of patients, but the number of cases has flattened and Madrid’s regional rates, the highest in the country a few weeks back, are falling.

The director general at Spain’s chemicals trade group FEIQUE told ICIS that production plants across the country will function normally as restrictions have left industrial sectors untouched.

FEIQUE has reported an increase in chemicals employment in Spain year on year in the January-September period, bucking the trend of increasing unemployment across the board.

“Those who have to work at night shifts can go to work [despite a national curfew at night]. For now, no sector within chemicals will experience any problem with the restrictions,” said FEIQUE’s director general Juan Labat.

“We expected employment to remain stable, but it rose. Chemicals have grown this year – helped by pharma, disinfectants, and hygiene products – but also more industrial sectors like automotive or construction are on the mend.”

Labat said that sectors like paints and coatings are now 7% lower than this time in 2019 but that would be a good figure considering “we expected to close the year 30% lower” when the first pandemic-induced forecasts were made in March.

“Our forecast is that output will close the year 6% lower than in 2019. If we consider average industrial levels are set to end 2020 with a 13% decrease, and the economy as whole could end up 12% smaller, chemicals will probably be one of the best performing sectors,” he said.

FEIQUE’s chief conceded that as the all-important hospitality sector takes a hit, unemployment will rise but was confident those with secure jobs will venture into big-ticket purchases like cars come 2021.

Whereas across much of Asia, restrictions are intended to keep infection rates low – Taiwan has marked 200 days without domestic infection – in Europe the key driver is hospital capacity, which could result in further lockdowns across the region if healthcare is overwhelmed.

This could also result in a winter of chronic infection and fatality rates that only just stop short of throttling hospital systems.

The rate and speed of infection growth is unlike anything seen in the spring for much of Europe, and the picture beyond November is difficult to interpret.

What will become apparent in the coming weeks is whether lockdowns prove as effective as they did earlier in the year, or if fatigue with measures reduces compliance and efficacy.

Picture: Barcelona's Boqueria market closing early due to a national curfew implemented in Spain 
Source: Paco Freire/SOPA Images/Shutterstock

Insight by Tom Brown and Jonathan Lopez

Additional reporting by Ben Lake and Jane Massingham 

Read the second part of this story on Tuesday (3 November): The second wave hits east Europe hard