20:11 PM | March 9, 2020 | Vincent Valk
The impact of coronavirus disease 2019 (COVID-19) appears increasingly likely to be felt by chemical companies into the second quarter, and possibly beyond, as the number of new cases mounts around the world. Supply chains have already been disrupted by widespread shutdowns in China, but manufacturers are bracing for big hits to earnings as COVID-19 spreads to mature markets.
Companies that reported fourth-quarter earnings later in February said that the impact to results is likely to be quite substantial, although the rapidly-evolving nature of the situation makes forecasts hard to pin down. “We don’t have a clear picture [of COVID-19’s impact] in North America and the EU,” says BASF chairman Martin Brudermuller said in late February. “I am not sure whether everyone on the customer side is really aware of how it will impact [them]. There will be surprises in the supply chain.”
Few companies have, as yet, quantified the earnings impact. Solvay estimates a first-quarter earnings hit totaling €25 million ($28 million), while Arkema is forecasting a reduction of €20 million in the first quarter. Ecolab says COVID-19 will reduce first-quarter earnings by 5 cents/share, and Dow is reportedly expecting a $100–150 million reduction in first-quarter EBITDA.
“There are all kinds of scenarios [for COVID-19],” Ecolab chairman and CEO Douglas Baker said in February. “If the diseases lasts … say into June, you really have this outage for supply chains, it’s going to have broader impacts.”
One analyst says the bounceback from COVID-19 could take some time, especially if there are widespread quarantines in the US and Europe. “Optimism for a rapid recovery will likely give way to caution on the pace or reacceleration in 2021,” says Laurence Alexander, an analyst with Jefferies (New York, New York). Jefferies is lowering earnings estimates for a number of chemical manufacturers “to better reflect likely ripple effects from a wider, if less severe, series of disruptions in Europe and, more modestly, in the US, where early-cycle end-markets will likely bear the brunt of the impact,” Alexander adds.
Despite the overall feeling of uncertainty, some effects from COVID-19 are already visible, especially in China—and those effects could hold lessons for the rest of the world. “The coronavirus has added a new factor that is considerably hampering growth at the beginning of the year, especially in China,” Brudermuller says. “Lower demand and production outages in many industries are already visible consequences of the measures taken to prevent the further spread of the virus.”
A mixed fourth-quarter
The uncertainty swirling around COVID-19 comes on the heels of mixed results for the industry in general in the fourth-quarter of 2019. In the US, some 24 chemical companies beat Wall Street estimates for fourth-quarter earnings, while 24 companies missed estimates, and 4 matched estimates. BASF, for its part, reported lower earnings and sales in the fourth-quarter.
Earnings misses were generally wider than earnings beats for US-based firms. Among the firms tracked by CW, the median adjusted earnings figure for the fourth-quarter was 75.4 cents/share, lower than the median analysts’ estimate for those firms by 3.3 cents/share. Specialties firms, which missed estimates by an average of less than 1 cent/share, outperformed basic chemical makers, which missed estimates by an average of about 8.75 cents/share.
Most firms said that 2020 was shaping up to look like 2019 before COVID-19 hit. “As we enter 2020, we are taking a conservative view given the macro and micro trends that we are seeing,” Dow CEO Jim Fitterling said in late January. The phase-one trade deal between the US and China, “should be a positive for sentiment,” he added.
“We see a similar environment to last year with North America architectural demand remaining solid and industrial demand remaining variable by geography and end market,” John Morikis, CEO of coatings maker Sherwin-Williams, said in late January.
But in recent weeks, outlook statements have emphasized uncertainty due to COVID-19. “While 2020 has started well, we will clearly see an impact [from COVID-19] throughout the supply chain and with our customers in the first quarter and the full year 2020 impact is yet to be determined,” Hexion chairman and CEO Craig Rogerson said on 3 March.
Markets wiped out
Meanwhile, stock markets have continued their plunge, as the spread of COVID-19 accelerated over the weekend and Italy announced a lockdown on its’ northern provinces, which have seen a severe outbreak of the virus. The S&P 500 is down by over 5%, with indices in the UK and Japan posting similar declines.
Chemical industry stocks have taken an even-larger hit. A composite of 32 industry stocks tracked by CW fell by an average of about 12% on 9 March. Dow and Chemours have seen share price drops of about 20%. The CW75 index has fallen by 10.7% since 18 February.
Concerns have also arisen around credit markets, particularly in high-yield debt related to the energy sector. Oil prices have plummeted this morning, partly due to the demand shock from COVID-19, but also partly due to an anticipated supply glut as Saudi Arabia and Russia embark on a price war. Debt issued by shale oil-and-gas producers in the US could lose a big chunk of value, market watchers say.
The bull run in equities does appear to be over, at least for now. “Our view is that the stock market drop will exacerbate … the severe tightening of the financial picture in the US,” says IHS Markit chief economist Nariman Behravesh. “You are not going to hear a lot of talk about the market being overvalued for quite some time.”