INSIGHT: Progress of vaccinations could buoy chems demand despite protectionism fears

Author: Tom Brown


LONDON (ICIS)--The gathering pace of coronavirus vaccination programmes is likely to swell chemicals demand through the year, according to industry research, despite a bumpy start in many countries and the spectre of protectionism looming ever larger.

The tale of vaccine development and rollout during the coronavirus pandemic is one of astonishing speed, with a raft of candidates developed and brought to market in under a year in spite of early projections in many quarters that it would takes years to develop and roll out a treatment.

The pace of development, assessment and rollout of multiple vaccines in this timeframe is one of the marvels of the era but, from the standpoint of the spread of a voracious virus, has been frustratingly slow in some countries.

“The fight against Covid-19 is not a sprint, it is a marathon,” said European Council President Charles Michel earlier this month, in response to criticism of the pace of the EU vaccine programme.

With the speed and violence of coronavirus flare-ups, currently seen across much of Europe and currently dimming economic prospects for the early second quarter, the fight against the virus may be closer to a marathon-length race, a challenge of endurance many nations have not faced in several generations.

Despite the uneven pace of rollouts in the developed world, with Israel, the US, the UK and the United Arab Emirates leading the pack and the EU lagging behind at present, pace is accelerating in general, despite intensifying vaccine nationalism.

The pandemic response is becoming increasingly political, with German Premier Angela Merkel quickly instituting and as speedily revoking an Easter lockdown in Germany in the face of widespread criticism, and Italy blocking shipments of vaccines to Australia.

The US is also controlling vaccine exports, and a face-off between the UK and the EU over the Oxford/AstraZeneca treatment is likely to come to a head in the near future.

A slow start in the EU as the bloc suffers through a third spike in infections has capped a rally in crude pricing on expectations of further lockdown measures, with cartel OPEC cutting its demand growth expectations for the first half of the year as a result.

Despite these issues, the overall direction of travel for vaccinations is bullish enough for the chemicals sector that ratings agency Moody’s has upgraded its forecast for the sector to positive this week.

“We expect Covid-19 vaccine rollouts will overcome initial teething problems and lay the ground for more consistent demand and EBITDA growth across most of the broadly diversified chemical industry,” the  agency said in a sector report.

Sector orders have become more hand to mouth and the demand visibility horizon has dimmed to a couple of months, as clients attempt to respond to a fast-changing landscape of lockdown rules and consumer habits, but this is likely to normalise as progress continues, according to the firm.

“Increasing immunisation rates and a gradual phasing out of lockdowns will result in a resumption of more stable demand growth leading to a normalisation of order patterns in terms of size and frequency,” it said

The performance of the chemicals sector has belied the idea of a pandemic downturn over the past few months.

With customer restocking and robust consumer demand in some sectors, along with stronger pricing due to sector outages, fourth-quarter profitability in 2020 largely eclipsed 2019 levels.

The rally has been broad-based across most sectors, with coatings producers benefiting from lower raw materials pricing and commodity producer performance firming from increased volumes and firmer pricing due to tighter supply.

LyondellBasell projected last week that it could see historic earnings in the second quarter of the year.

Conditions are stronger for commodity players at present than specialties as a result of the current outage picture. Players with significant transport sector exposure continue to face headwinds, but the pricing along the ethylene chain is likely to remain above the second-quarter 2020 trough for the whole year.

Moody’s singled out Dow, INEOS and LyondellBasell as best-placed to capitalise on current conditions this year, while commodity players that are particularly exposed to the US market are likely to face first-quarter issues due to the impact of the harsh Gulf Coast winter weather.

“Specialty chemicals will perform well overall, although demand will ease for those that have benefited from the pandemic and some will be affected by higher commodity prices,” Moody’s said. “The resumption of growth has so far been supported by increased industrial output.”

While Asia continues to lead the world in overall economic growth, the pace of manufacturing has accelerated dramatically in Europe and the US, with the pace of output growth in the eurozone reaching the fastest pace since analyst Markit started recording levels in 1997.

The pace of demand growth is such that order backlogs have started to emerge, while supply chain blockages have become more prevalent and raw materials pricing has increased as the sector heats up.

This is already starting to have an effect, particularly in Germany, which has been the epicentre of industrial demand growth. Taken alongside the intensifying lockdown controls across Europe, almost half of executive surveyed by German chemicals trade group VCI are expecting setbacks in the first quarter of the year.

The increasing political tensions around vaccines and some of the bureaucracy and false starts mean that analyst forecasts that the developed world will have turned a corner on the pandemic by spring seem increasingly unlikely.

Protectionism and stockpiling in advanced economies mean that the picture is even bleaker for emerging markets, where limited access to vaccines mean that the pandemic could remain in place for years into the future.

Some markets such as refining may never recover and we may be approaching the midpoint of the decade before others such as aviation rebound.

Nevertheless, despite the impression that day to day headlines may give of the pandemic response as a rattling machine that could fall apart at any moment, the overall trend is a positive one.

Even vaccine blockades such as the one the European Commission is mooting against the UK will only serve to lengthen timelines by a couple of months, and from a bird’s eye view of the crisis, the progress is more harmonious and steady than it appears from a more granular perspective.

From an economic perspective, 2021 is not like 2020, no matter how much it may feel like it on a day to day individual basis as lockdowns continue and flashpoints to rage across the globe.

Insight by Tom Brown