In these strange times, the news that the global economy is heading towards recession should come as a shock to no one.
A recent report by the BBC, states that, “In China, where the coronavirus first appeared, industrial production, sales and investment all fell in the first two months of the year, compared with the same period in 2019.” Adding that, “Chinese car sales, for example, dropped by 86% in February… oil has slumped to prices not seen since June 2001…. Restrictions have affected the supply chains of big companies such as industrial equipment manufacturer JCB and carmaker Nissan.”
Meanwhile, according to the Organisation for Economic Cooperation and Development (OECD), “The world's economy could grow at its slowest rate since 2009 this year due to the coronavirus outbreak.”
When the recession, or maybe even depression, does hit, nowhere will this be felt more widely than the chemical industry. As the global economy slumps, demand for products will slump, and as the chemical industry has a hand in the manufacture of just about everything, the chemical industry will slump too.
Early signs of this have already been felt.
“The Chemical Activity Barometer (CAB), an economic indicator created by the American Chemistry Council (ACC), fell 2.6% in March on a three-month moving average (3MMA) basis…” reports the chemical industry journal Chemical Processing. Specifically noting that, “The unadjusted data shows an 8.0% decline in March following a 1.1% decline in February and a 1.2% gain in January.”
The CAB is a thorough statistical analysis of how the American chemical industry is performing and focuses on chemical product prices, chemical product inventories, equity prices, and levels of chemical production.
The trends that the latest CAB report found make for some difficult reading.
“Production-related indicators generally declined in March,” the report states. “Trends in construction-related resins, pigments and related performance chemistry were generally negative. Plastic resins used in packaging and for consumer and institutional applications were generally negative. Performance chemistry was negative and U.S. exports were weak. Equity prices collapsed but are improving this week. Product and input prices declined. Inventory and other supply chain indicators were negative.”
Such data is a key indicator of the troubling economic times ahead. As Kevin Swift, chief economist at the ACC, explains, “The CAB signals recessionary conditions in U.S. commerce. ACC believes a recession to be occurring when the barometer declines for three consecutive months and falls 3.0% or more from the peak. As of March, the CAB has declined for two straight months and fallen 8.9% from the peak.”
Given that an economic storm is approaching, how should chemical companies react in a coronavirus recession?
To help find the best route for chemical companies to weather the upcoming economic storm, chemical industry analysts from the consultancy McKinsey & Sons, studied data from the 264 largest publicly listed chemicals companies in the world.
The data they gleaned showed that during the last economic slump 20% of those chemical businesses performed decidedly better than the others. The researchers decided to name this portion of the sample the ‘resilients’.
The analysts then looked at the strategic business decisions that those firms took to outperform the less successful 80%.
As the report explains, “Generally speaking, resilient companies took action in areas where their competitors did not…Not only did the resilients perform better in the downturn and during recovery, but they were also able to maintain this advantage and outperform their peers in the growth phase.”
What should chemical producers and suppliers do to be ‘resilient’ in the upcoming coronavirus economic downturn?
The McKinsey team noted five key courses of action that can benefit chemical companies in times of economic turmoil. These are;
1. Early preparation of balance sheets.
Chemical companies that fared better during the last economic recession “reduced leverage before and during the downturn” and were then able to invest those funds more effectively during the recovery.
2. Profit Focus.
Successful chemical companies stay focused on profit, even during a recession.
3. Minimised Costs.
Successful chemical companies cut costs quickly and maintained minimal overheads. They reacted swiftly to the drop in demand, lowering expenditure, removing waste, and generally tightening belts before the worst of the economic downturn hit. They also maintained a tight rein on costs as the recovery began.
4. Proactive Restructuring.
‘Resilients’ acted more decisively to reorganise their businesses to face the impending drop in chemical product demand. They adjusted quickly to the new economic circumstances and made plans to re-adapt for when the recovery would begin.
5. Sell Early, Prepare to Buy.
Successful chemical companies were able to divest their businesses of unnecessary sectors early in the last recession. They then made themselves ready to acquire new stock or move into new sectors as soon as signs of recovery could be seen. Buying early when prices were low set up ‘resilent’ chemical companies for greater success when chemical product demand returned.
While no-one can be certain how long and how hard the upcoming recession will be, logic suggests that maybe this downturn will be shorter and shallower than others. The economic stimulus packages adopted by the EU, US, and others has been implemented early. Politicians and economists have learnt of the need for big and fast government action in such situations.
Equally, this recession will not be led by a drop in demand or economic confidence like previous downturns. Instead, consumers have been restricted in their economic activity by the need for social distancing. While many businesses will suffer (and some will collapse) due to the lack of any economic turnover during the shutdown, consumers will be quick to return to as soon as restrictions have lifted.
Unlike other recessions where a drop in demand leads to mass unemployment, government assurances of guaranteed pay checks for both employees and the self-employed may result in a mere delay of purchasing for a month or two that will instantly return when car show rooms, furniture stores, and holidays become available again.
In that sense, the economic slump may become a short, sharp shock. Given that much of the advice that McKinsey offers relies on speed of action by leadership, then chemical companies should not fear a lack of economic activity.
Instead, for them, now maybe the time for action.