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Coronavirus Casts a Pall Over Chemical Industry: Here's How
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The chemical industry, which reeled under the effects of the bitter tariff war between the United States and China last year, braces for another heavy hit from the coronavirus outbreak.
Officially called COVID-19, the virus has so far claimed roughly 2,800 lives and infected more than 82,000 people in over 40 countries. Notably, the outbreak has been spreading fast outside China of late.
The epidemic, which now appears to be hurtling into a full-blown pandemic, has raised concerns whether China’s supercharged economy is heading for a hard landing. China’s government has taken draconian measures to contain the contagion through lockdowns and quarantines on the worst-hit areas, including the city of Wuhan in Hubei province, the epicenter of the epidemic.
Beijing also had extended the New Year holidays in a bid to restrict the spread of infections. While COVID-19 has a lower mortality rate than SARS, it is way more contagious and has an incubation period of 14 days or more as seen in certain cases, making it harder to detect early and contain.
Worries are also creeping into global stock markets, as investors fret over the impact of the outbreak on global economic growth. Fears over a sharp rise in new coronavirus cases in South Korea, Japan, Italy and the West Asia, which point to a new phase in the epidemic, have triggered sell-offs across stock markets around the world on concerns over greater economic impact from the contagion.
Coronavirus Clobbers China’s Economy
China President Xi Jinping recently said the outbreak is the country’s "largest public health emergency" since the founding of the People's Republic in 1949 and also acknowledged that it will have a short-term impact on the domestic economy.
The roughly 18-month-long tariff war with the United States has already taken a bite out of China’s economy. Notably, the economy saw the weakest growth in almost three decades at 6.1% in 2019, lower than 6.6% recorded in 2018.
The International Monetary Fund (IMF) recently lowered its global growth forecast for this year due to the outbreak. It expects the virus to cut global growth by 0.1 percentage point. The IMF, in January, predicted a rise in global growth to 3.3% in 2020 from 2.9% last year. It also predicts coronavirus to lower China's economic growth to 5.6%, which is 0.4 percentage point lower than its January outlook.
It is worth nothing that China, which accounts for roughly 20% of global GDP, is more important to the world economy now than it was during the SARS outbreak in 2003. As such, any slowdown in China’s economy will have ripple effects around the globe.
China’s manufacturing sector, which bore the brunt of trade war for most part of 2019 and only rebounded toward the end of the year, is likely to take another shock. Nevertheless, Beijing has pledged a raft of stimulus measures to counter the economic fallout from the epidemic.
Chemical Makers Brace for Demand Shocks
The chemical industry is among the industries rattled by trade tariffs. The U.S. chemical industry has been hit the hardest.
While the recent completion of the preliminary trade deal averted the implementation of a new round of tariff on chemicals and plastics, the hefty tariffs currently in place have done significant harm to the U.S. chemical industry. Beijing’s retaliatory tariffs have hurt U.S. chemical exports and the competitiveness of the American chemical industry.
Coronavirus adds to the pains of the chemical industry. Disruptions associated with the outbreak are expected to hurt chemical demand in China, a major consumer, over the short haul. Slowdown due to coronavirus is expected to lead to lower consumption of chemicals, including ethylene, polyethylene and polyvinyl chloride in China, at least in the first quarter of 2020. As such, chemical makers are expected to face short-term demand weakness in China as industrial activities in the country take a blow due to the shutdowns.
Notably, weak demand resulting from a downturn in industrial activities due to the trade conflict and the global slowdown had plagued companies in the chemicals space in 2019. Trade issues led to a slowdown in industrial activities globally, hurting demand for chemicals and plastics. Demand remains soft in certain key chemical end-use markets such as automotive, electronics and agriculture.
The automotive market in China has already slowed considerably owing to the trade tiff. Coronavirus-induced panic is further hurting this market. Car sales in the country dropped in January for the 19th straight month. Moreover, sales tumbled 92% during the first half of February, per China Passenger Car Association, as the epidemic impeded new purchases. A recovery in sales is not expected before the second half of 2020.
Moreover, coronavirus has slowed down construction activities in China as workers who returned from the Chinese New Year holidays were being quarantined.
Chemical makers echoed concerns of a potential slowdown in demand in China during their December quarter earnings call. Celanese Corporation (CE - Free Report) noted that any extended shutdown in China could lead to a decline in both demand and supply. Moreover, Eastman Chemical Company (EMN - Free Report) hinted that customer shutdowns in China may impact demand and volumes.
Westlake Chemical Corporation (WLK - Free Report) also noted that it is adopting a conservative view for 2020 in the wake of the outbreak and its potential impact on global industrial demand. Meanwhile, Huntsman Corporation (HUN - Free Report) stated that coronavirus is impacting its business in China. Albemarle Corporation (ALB - Free Report) also said that it expects delays associated with the virus to cause a weaker first half.
Supply Disruptions to Push Up Chemical Input Costs
China, the global manufacturing powerhouse, is the source of many consumer and industrial products. The closure of a large swath of factories across the nation to put a check on the spread of the virus has threatened to disrupt the global supply chain. Wuhan is one of China's biggest manufacturing centers and the country’s transportation and logistics hub. Coronavirus has impaired logistics across the country.
Fallouts from the supply disruption in China could affect the availability of raw material for the chemical industry during the first half of the year. Notably, U.S. chemical makers procure several chemicals critical to their production processes from China. Shutdowns due to the outbreak are likely affect the delivery of key raw materials. The supply disruption will also lead to a spike in costs of these inputs and eat into margins of chemical makers, with most of the impact expected to be felt in the March quarter.
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Coronavirus Casts a Pall Over Chemical Industry: Here's How
The chemical industry, which reeled under the effects of the bitter tariff war between the United States and China last year, braces for another heavy hit from the coronavirus outbreak.
Officially called COVID-19, the virus has so far claimed roughly 2,800 lives and infected more than 82,000 people in over 40 countries. Notably, the outbreak has been spreading fast outside China of late.
The epidemic, which now appears to be hurtling into a full-blown pandemic, has raised concerns whether China’s supercharged economy is heading for a hard landing. China’s government has taken draconian measures to contain the contagion through lockdowns and quarantines on the worst-hit areas, including the city of Wuhan in Hubei province, the epicenter of the epidemic.
Beijing also had extended the New Year holidays in a bid to restrict the spread of infections. While COVID-19 has a lower mortality rate than SARS, it is way more contagious and has an incubation period of 14 days or more as seen in certain cases, making it harder to detect early and contain.
Worries are also creeping into global stock markets, as investors fret over the impact of the outbreak on global economic growth. Fears over a sharp rise in new coronavirus cases in South Korea, Japan, Italy and the West Asia, which point to a new phase in the epidemic, have triggered sell-offs across stock markets around the world on concerns over greater economic impact from the contagion.
Coronavirus Clobbers China’s Economy
China President Xi Jinping recently said the outbreak is the country’s "largest public health emergency" since the founding of the People's Republic in 1949 and also acknowledged that it will have a short-term impact on the domestic economy.
The roughly 18-month-long tariff war with the United States has already taken a bite out of China’s economy. Notably, the economy saw the weakest growth in almost three decades at 6.1% in 2019, lower than 6.6% recorded in 2018.
The International Monetary Fund (IMF) recently lowered its global growth forecast for this year due to the outbreak. It expects the virus to cut global growth by 0.1 percentage point. The IMF, in January, predicted a rise in global growth to 3.3% in 2020 from 2.9% last year. It also predicts coronavirus to lower China's economic growth to 5.6%, which is 0.4 percentage point lower than its January outlook.
It is worth nothing that China, which accounts for roughly 20% of global GDP, is more important to the world economy now than it was during the SARS outbreak in 2003. As such, any slowdown in China’s economy will have ripple effects around the globe.
China’s manufacturing sector, which bore the brunt of trade war for most part of 2019 and only rebounded toward the end of the year, is likely to take another shock. Nevertheless, Beijing has pledged a raft of stimulus measures to counter the economic fallout from the epidemic.
Chemical Makers Brace for Demand Shocks
The chemical industry is among the industries rattled by trade tariffs. The U.S. chemical industry has been hit the hardest.
While the recent completion of the preliminary trade deal averted the implementation of a new round of tariff on chemicals and plastics, the hefty tariffs currently in place have done significant harm to the U.S. chemical industry. Beijing’s retaliatory tariffs have hurt U.S. chemical exports and the competitiveness of the American chemical industry.
Coronavirus adds to the pains of the chemical industry. Disruptions associated with the outbreak are expected to hurt chemical demand in China, a major consumer, over the short haul. Slowdown due to coronavirus is expected to lead to lower consumption of chemicals, including ethylene, polyethylene and polyvinyl chloride in China, at least in the first quarter of 2020. As such, chemical makers are expected to face short-term demand weakness in China as industrial activities in the country take a blow due to the shutdowns.
Notably, weak demand resulting from a downturn in industrial activities due to the trade conflict and the global slowdown had plagued companies in the chemicals space in 2019. Trade issues led to a slowdown in industrial activities globally, hurting demand for chemicals and plastics. Demand remains soft in certain key chemical end-use markets such as automotive, electronics and agriculture.
The automotive market in China has already slowed considerably owing to the trade tiff. Coronavirus-induced panic is further hurting this market. Car sales in the country dropped in January for the 19th straight month. Moreover, sales tumbled 92% during the first half of February, per China Passenger Car Association, as the epidemic impeded new purchases. A recovery in sales is not expected before the second half of 2020.
Moreover, coronavirus has slowed down construction activities in China as workers who returned from the Chinese New Year holidays were being quarantined.
Chemical makers echoed concerns of a potential slowdown in demand in China during their December quarter earnings call. Celanese Corporation (CE - Free Report) noted that any extended shutdown in China could lead to a decline in both demand and supply. Moreover, Eastman Chemical Company (EMN - Free Report) hinted that customer shutdowns in China may impact demand and volumes.
Westlake Chemical Corporation (WLK - Free Report) also noted that it is adopting a conservative view for 2020 in the wake of the outbreak and its potential impact on global industrial demand. Meanwhile, Huntsman Corporation (HUN - Free Report) stated that coronavirus is impacting its business in China. Albemarle Corporation (ALB - Free Report) also said that it expects delays associated with the virus to cause a weaker first half.
Celanese, Huntsman and Albemarle currently carry a Zacks Rank #3 (Hold), while Eastman Chemical and Westlake Chemical have a Zacks Rank #5 (Strong Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Supply Disruptions to Push Up Chemical Input Costs
China, the global manufacturing powerhouse, is the source of many consumer and industrial products. The closure of a large swath of factories across the nation to put a check on the spread of the virus has threatened to disrupt the global supply chain. Wuhan is one of China's biggest manufacturing centers and the country’s transportation and logistics hub. Coronavirus has impaired logistics across the country.
Fallouts from the supply disruption in China could affect the availability of raw material for the chemical industry during the first half of the year. Notably, U.S. chemical makers procure several chemicals critical to their production processes from China. Shutdowns due to the outbreak are likely affect the delivery of key raw materials. The supply disruption will also lead to a spike in costs of these inputs and eat into margins of chemical makers, with most of the impact expected to be felt in the March quarter.
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Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2019, while the S&P 500 gained and impressive +53.6%, five of our strategies returned +65.8%, +97.1%, +118.0%, +175.7% and even +186.7%.
This outperformance has not just been a recent phenomenon. From 2000 – 2019, while the S&P averaged +6.0% per year, our top strategies averaged up to +54.7% per year.
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