INSIGHT: Lockdowns cripple Europe automotive industry, chemicals demand to suffer

BARCELONA (ICIS)- Residents of Spain woke up on Sunday morning to the news that the country is in lockdown for a period of 15 days, likely to be extended until spread of the coronavirus has been brought under control.

The impact is immediate and very visible – with police patrolling the empty streets and most shops, restaurants and many businesses now closed. People are cooped up in their houses, leaving only to buy essential supplies or go the doctor. Although travel for work is permitted, working from home has become the norm for those of us lucky enough to have that option.

Economic activity is decreasing, and may grind almost to a halt over the coming weeks in locked down countries thanks not just to the immediate physical effect of the restrictions but also to a huge impact on consumer sentiment. People are worried about their jobs, so purchase of big ticket items such as automobiles is likely to slow to a trickle.

For citizens of countries in lockdown we are likely to see a reduction in spending to just the essentials.

SUPPLY CHAIN DISRUPTION
With European lockdowns now in place in Italy, Spain and the Netherlands, evidence of supply-side disruption to industrial supply chains and downstream demand is becoming clearer.

Several Europe-based car makers are already shutting plants or reducing operations because of disruption to the supply of components from Italy and Spain. Poor demand and worker safety have also played a part in their decisions.

Fiat said on 16 March that it will close sites in Italy, Serbia and Poland until 27 March. On 14 March Ferrari announced it will cease production at its sites in Maranello and Modena until 27 March. The company said it is now experiencing serious supply chain issues which make continued production impossible.

PSA Group, which includes Peugeot, Citroën, Vauxhall/Opel and DS, said on 16 March it would also close several European automotive plants until 27 March:

• March 16: Mulhouse (France), Madrid (Spain)
• March 17: Poissy, Rennes, Sochaux (France), Zaragoza (Spain), Eisenach, Rüsselsheim (Germany), Ellesmere Port (United Kingdom), Gliwice (Poland)
• March 18: Hordain (France), Vigo (Spain), Mangualde (Portugal)
• March 19: Luton (United Kingdom), Trnava (Slovakia)

According to the Financial Times on 16 March, Volkswagen may curtail production at several European plants including its Wolfsburg, Germany headquarters over the coming days. It is suffering from a lack of parts sourced from Italy and Spain.

Ford, Renault and Seat have also reportedly closed production in Spain because of supply chain disruption.

CHEMICALS IMPACT
The economic shock caused by the virus is likely to see Europe’s economy contract, at least in the second quarter of the year.  Earlier in March Oxford Economics forecast a drop in eurozone GDP to 0.6% for 2020, but that now seems optimistic, given the disruption being seen this week.

According to ICIS preliminary forecasts made last week, both polymers and ethylene could take a hit to output this year, thanks to the virus.

There are a few bright spots, however, especially for products such as isopropanol which goes into hand sanitizer.

Panic buying at supermarkets may also provide a temporary stimulant to packaging, food and household cleaning ingredients plus plastic packaging sectors.

For many chemical companies, however, a stalling economy will feed through into lower demand for chemicals as weaker consumer demand is felt up the supply chain.

Whether the economic shock is as bad as China’s coronavirus shutdown remains to be seen. China suffered double-digit declines in industrial output and retail sales during January and February. Its  Caixin China General Manufacturing Purchasing Managers Index (PMI) plunged to a record low of 40.3 for February from 51.1 in January, indicating steep contraction.

Restrictions are not as severe so far in Europe, with the enforced closures of manufacturing capacities we saw throughout China. However, as the automotive sector demonstrates, disruption to manufacturing is already apparent.

As the graph shows, during the 2008/9 financial crisis European and US PMIs fell to below 35 whilst China stayed above 40.

Automotive is one of the most important end use markets for chemicals, accounting for up to 35% of demand for nylon resins, for example. Disruption to automotive production will therefore have a serious impact on demand for these commodities.

VIRUS COULD BE HERE TO STAY
The number of new cases in China is now declining as the country’s strict lockdown effectively prevented further spread of the virus. There is, as yet, no scientific consensus on the longevity of the virus with estimates ranging from a few months to a year or more.

International eChem chairman, Paul Hodges, is very concerned about the likely impact on European and, later, US chemical markets.

He said: “It is impossible to overestimate the likely impact on the European – and soon the North American – chemical industry. Borders are shutting, consumers are being locked-down, oil and stock markets are crashing.  And, of course, epidemiologists are warning it may well take a year for the pandemic to be brought under control.”

He believes following the pandemic it is highly likely there will be no return to “business as usual.”

“Demand patterns were already changing before the pandemic began, and the shift towards sustainability and away from globalisation is now likely to accelerate,” he added.

Rhian O’Connor contributed to this article
Insight by Will Beacham

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