Coronavirus shadows China’s chemical industry

With its escalating infections, city shutdowns, and nationwide transportation halts, the coronavirus epidemic is starting to strain China’s chemical industry. But experts see the impact as manageable and, they hope, shortlived.

By the afternoon of Feb. 5, 24,423 people were confirmed infected with the new virus, 16,678 of them in the central Chinese province of Hubei. The death toll in the province was 472, more than the 349 people who died in China from the SARS virus in 2003.

The government has shut down transportation in and out of all cities in Hubei and extended the lunar New Year holiday until Feb. 9 for most factories nationwide. Even if the epidemic is controlled in the coming months, frozen consumption, reduced factory output, and disturbed supply chains will cut 0.1 to 0.2 percentage points from global economic growth in 2020, according to a Goldman Sachs forecast quoted by the Financial Times.

Chemical companies are already feeling the impact. Shuanghuan Chemical, a Hubei-based company focused on chlorine chemistry, warned on Feb. 2 that half of its revenues come from Hubei and that its first-quarter earnings will be severely impacted by the coronavirus epidemic.

According to a report released on Feb. 3 by the Beijing-based investment bank CSC Financial, Hubei’s chemical industry was China’s fifth largest in 2018, accounting for 3.5% of national output. Nationwide, the high level of automation in chemical production should dampen the impact of labor dislocation caused by quarantines, CSC says, and transportation restrictions should only temporarily block movement of industrial materials. The most likely scenario, the report says, is declining prices caused by weakened demand.

Hubei, and much of central China, is an important manufacturing base for polyester and the textile industry, according to Salmon Lee, a Singapore-based senior consultant at Wood Mackenzie. A prolonged transport paralysis could mean no fabric and clothing produced in major coastal production bases. “If the virus spreads further, more cities and/or provinces in China could see a similar lockdown,” Lee says. “That would be a logistical catastrophe, and disruption to the polyester and textile industries would be disastrous.”

Liao Ying, a senior executive at Xianglong Logistics, a Chinese chemical storage and transportation provider, contends that the situation is manageable. Due to the lengthened holiday and a seasonal demand lull, transporting raw materials to chemical makers should not be a big problem, he says.

Talking to stock analysts on conference calls to discuss fourth-quarter results, US chemical executives also said they are counting on the holiday slowdown to dampen the virus’s impact on demand. Eastman Chemical CEO Mark Costa said he anticipates an extension of the holiday season. “We do have nine plants in China and two offices. So we’re focused on those, and there is obviously going to be a delay, based on the Chinese extending the New Year out by one to two weeks,” he said.

There’s also a lot that executives don’t know. “We don’t know how long or what the impact is,” said Lori Ryerkerk, CEO of Celanese, which produces acetic acid and derivatives in China. “At this moment in time, we don’t have any employees affected, and our operations continue as they were going into this. So at this point, we’re not seeing an impact. I mean, clearly, if producers shut down, if this is extended, there could be a drop in demand.”

Dow CEO Jim Fitterling told analysts that he expects the virus will have an impact on Chinese consumption patterns. “I had the experience to live there during the SARS epidemic, and it feels like, to me, what we went through during the SARS time period,” he said.

“You’re seeing an impact on tourism, people staying at home, people not going to restaurants. The service industry gets hit a little bit. People may be making a run at the grocery store to stock up on things. You’re seeing some pull on demand on things like materials that are going into household cleaners or disinfectants, nonwovens that are going into masks or wipes.”

But China’s chemical industry is much larger today than it was in 2003 during the SARS virus outbreak. The value of Chinese chemical output has grown more than 12 times, from $125 billion in 2003 to $1.5 trillion in 2018, according to Chinese government statistics.

Another difference is that in 2003, China’s chemical industry was expanding robustly, the CSC Financial report notes, and demand wasn’t severely impacted, even during the epidemic’s most serious period in the second quarter. In contrast, the sector experienced a year and a half of declining prosperity before the coronavirus outbreak, so companies have less cushion if the epidemic doesn’t quickly ease.