May 26, 2020

Cyclicals - Long-Term Pandemic Impact

CAT, CTVA, KEX, MTW
By Jarrett Harris
Sources interviewed in mid-May said the pandemic’s impact on business continues to worsen and is likely to be more severe than the 2008 financial crisis, but they were less pessimistic about 2021 than sources interviewed in late April and early May.
  • North America: Business failures, commodity price pressure and escalating trade tension continue to pressure North American cyclicals markets
  • EMEA: Construction activity in Western Europe improving slightly, mining sources in Russia report continued deceleration
  • Latin America/Asia: Mine operators report worsening conditions and expect more severe downturn vs. 2008 financial crisis

Pandemic Impact Continues to Worsen in North America

Pandemic’s Impact on Sources’ Business
(number of sources)
 NORTH AMERICAEMEALATIN AMERICAASIATOTAL
Improving-4--4
Stabilizing21--3
Worsening952218
Other31--4
Don’t know2---2
Comparative Index-----56
May 8 Index-----20*
* May 8 note included only North America and China. Some difference in the comparative index may be attributable to the sectors and geographies the sources represent.

A higher percentage of sources worldwide said the impact of the coronavirus (COVID-19) pandemic continues to worsen compared with OTR Global’s May 8 note.

North America: One emerging concern in North America is business failures, which several sources said are only just beginning. “There’s going to be more turmoil. There are very large, aggressive farmers that are heavily leveraged that are now at risk,” a U.S. multi-state seed company source said. A U.S. frac sand mining executive said, “It’s total chaos and demand destruction with no light at the end of the tunnel. Everybody is going to redesign their supply chains.” Sources with exposure to resource extraction were particularly negative. “[Copper] mining [in Arizona] just died. In a matter of two and a half weeks it just died. We’re going to make a strategic change and move into different markets. It literally just fell off a ledge. There were four projects that we had under contract that were just canceled,” a U.S. nonresidential contractor said. A mining consultant said, “We haven’t seen the real slowdown yet. There’s going to be less demand for cars and refrigerators. How many people will go out and buy that car and put it on a credit line? That’s assuming they even have jobs to go back to.”

EMEA: Sources in EMEA were mixed on the slope of the pandemic’s impact, with those in Western Europe reporting modest improvement since all countries eased lockdown measures in May. Russian sources reported continued declines as the pandemic continues to spread in the country. “For two months, 90% of projects were totally stopped. The situation has been improving in May: we are now at 40% of normal activity,” a French crane distributor said. A Russian mine operator said, “The pandemic has impacted coal demand, and I think that the situation is likely to deteriorate a lot more.”

Latin America and Asia: Sources in Latin America and Asia -- all in the mining industry -- reported continued worsening conditions. “Before COVID, business was booming. After, industries slammed the brakes on investments,” a Brazilian mining equipment executive said. An Indian miner said, “Production came to a halt after the first lockdown was announced. Copper production is now at one-third of usual levels. The mining department of the government is not working, so things have come to a standstill.”

Downturn Severity Still Expected Worse vs. 2008

Expected Pandemic Downturn Severity vs. 2008-2009 Financial Crisis
(number of sources)
 NORTH AMERICAEMEALATIN AMERICAASIATOTAL
Less65--11
Same-----
More842216
Don’t know22--4
Comparative Index-----19
May 8 Index-----43*
* May 8 note included only North America and China. Some difference in the comparative index may be attributable to the sectors and geographies the sources represent.

Most sources globally expect the current downturn to exceed the severity of 2008.

North America: Top concerns for sources in North America include commodity price pressure and the potential for escalating trade tensions. “[The pandemic] is having a much larger impact on our business than 2008-2009 did. There’s no question about it. This is hitting basic commodity prices and will cause ag industry failures,” a seed distributor said. A U.S. mining consultant said, “I am more concerned about U.S.-China trade relationships. Trying to mend that will be very difficult, and it is exacerbating the focus on U.S. critical minerals.” However, several sources said the nature of a lockdown-fueled downturn may allow for a sharper rebound. “I’m less scared of this than I was of 2008. In 2008, you could see what was coming. You knew it was going to be bad and it was going to last a while and you couldn’t escape it. With this, everything could go back to normal next week if we wanted,” a U.S. crane distributor said. “Still, I’m telling the dealer principals not to buy anything.”

EMEA: Crane sources in Western Europe cited escalating business failures and increasing unemployment as top concerns for the remainder of 2020, while Russian mining sources could not yet assess the full impact of the crisis. “We see projects restarting, but it’s clear some companies will go down as they have no financial reserves,” a French crane distributor said. A U.K. source said, “Without a doubt, this is worse than in 2008. All staff is furloughed. … My feeling is that I will take half of our staff back, but there is no work out there.” A French crane distributor said, “I feel we have more support from the government than in 2008, and projects are restarting.”

Latin America and Asia: All sources in Latin America and Asia expect a more severe downturn than in 2008. “The 2008 crisis was a financial crisis and mining companies in Brazil were not indebted and did not depend on capital so were less impacted. COVID-19 is worse because it is affecting the health and safety of businesses and people and is breaking the supply chain,” a Brazilian miner said. An Indian miner said, “Slowly, globally, we will be inching toward growth, but it will take a long time. There will be a lot of uncertainty. We can live now only on government stimulus.”

2021 Outlook Improves Slightly

Expected 2021 Business Levels vs. 2019 Levels
(number of sources)
 NORTH AMERICAEMEALATIN AMERICAASIATOTAL
Exceed41-27
Meet241-7
Fall below411-6
Don’t know65--11
Comparative Index----5
May 8 Index-----19*
* May 8 note included only North America and China. Some difference in the comparative index may be attributable to the sectors and geographies the sources represent.

Sources were mixed on whether 2021 business levels could match 2019, but were more optimistic than sources interviewed in the May 8 note.

North America: North American nonresidential contractors were relatively confident in 2021 demand levels. “2021 should be what 2020 should have looked like, so we are anticipating 30% growth in annual revenues and that’s not going to happen until next year,” one U.S. nonresidential contractor said. However, several expressed concern. “You would think we would pick up where we left off, but we’re facing a demand shock with 14% of the population out of work,” another nonresidential contractor said.

EMEA: All but one Western European source expect 2021 demand to be in line with 2019. “The aim is to be on par with 2019, as projects are just pushed back. Large infrastructure projects are not questioned,” a French crane distributor said. A German crane distributor said, “The construction sector is not hit as hard as other sectors. We expect business to come back to normal in 2021.” Russian sources could not make projections yet.

Latin America and Asia: The two sources in Latin America were split on whether they expect 2021 demand to be in line with or below 2019 levels. “The world is moving from an economic recession to an economic depression. I don’t see how we can recover the 2019 levels in such little time,” a Brazilian mine operator said. Both Asian sources expect 2021 levels to exceed 2019. An Indian miner operator said, “Growth was supposed to be happening in 2020, but that growth has been delayed because of COVID-19. That growth will be coming in 2021.”

Additional Quotes
On Near-Term Pandemic Impact
“For us so far, business has been active -- we’re just waiting for the wheels to fall off.” U.S. crane distributor

“Currently, the public [sector] is generally maintaining pace, but the private sector is off, probably in the 15%-20% range.” U.S. nonresidential contractor

“Three things we are watching on recovery are how much will people get back to driving in 2020; how long does it take to reduce the crude inventory overhang; and what’s the price of oil going to be. At $30-$35, some of the big E&Ps can operate, but $40 is needed to bring back a broader restart of operators.” U.S. class I railroad executive

“Our unit tows have slowed dramatically. We’re getting 10- to 12-day gaps between tows. We’re still moving a little black oil, but my term guys are dying, everything is backed up.” U.S. inland tank barge operator

“The situation is very slightly improving, as we can see some movement with inquiries coming in. But, due to the lack of construction material supply, not much is moving at the moment.” U.K. crane distributor

“Sixty percent to 80% of small projects are restarting. It’s taking longer for larger projects for administrative reasons.” French crane distributor

“We have many long-term contracts with industry companies which are not affected, but we have losses coming from small, short-term assignments.” German crane distributor

“The pandemic is now impacting the Russian economy, including the construction sector.” Russian mine operator

“The arrival of the pandemic set a turning point in our business and we’re forecasting at least a 15% downturn in material sales.” Brazilian mine operator

“March and April have been sluggish. Demand on thermal power is low, so coal demand is also low.” Indian mine operator

On Severity of Downturn
“The recovery will be long and hard -- I don’t anticipate a quick bounce-back. There’s a lot of people out of work propped with massive amounts of recovery funding right now, but there will be a lot that are out of work for a long time.” U.S. nonresidential contractor

“It won’t surprise me to see companies hunker down and start conserving cash. It’s back to surviving.” U.S. mine operator

“I was working the same job in 2008, and that didn’t impact the energy market nearly as hard. I expect this to go a lot deeper than what happened in 2008.” U.S. inland tank barge operator

“People aren’t out moving around. But they will be. And we’ve got short memories and like to spend money.” U.S. nonresidential contractor

“If we can start moving things pretty soon, then we will be OK. From our point of view and that is our customers’ point of view, when they get construction material again, they’ll start resurrecting. If another six weeks pass without that, the curve will go off a cliff.” U.K. crane distributor

“The 2008 crisis mostly affected banks and the real estate sector, while the COVID-19 crisis is much more omnipresent, affecting every sector and everyone.” German crane distributor

“We expect many bankruptcies from small companies … taking advantage of government support. There is more support from the government in 2020 than in 2008.” French crane distributor

“So far I think the 2008-2009 crisis hit our company much harder than the current pandemic.” Russian mine operator

“Because the pandemic is so new, so unpredictable and so violent, you have no means of making a forecast. There is a huge difficulty to know when it will be over, when the economy will pick up again, and what the ‘new normal’ will be.” Brazilian mine operator

On 2021 Business
“Sitting here today, I think we will beat 2019 in 2021.” U.S. nonresidential contractor 

“We want to come back to 2019 levels in 2021. Large projects have not been canceled, and we can hope than activity will be back to normal in June 2020.” French crane distributor

“2020 will be below 2019, but I think 2021 should be on par or maybe only slightly below 2019. The longer this goes on for, the more difficult it will be.” U.K. crane distributor

“Our activity is unlikely to go down [yy], be it in 2020 or 2021, as gold demand keeps increasing and is expected to continue to increase in the coming years.” Russian mine operator

“The world is moving from an economic recession to an economic depression. I don’t see how we can recover the 2019 levels in such little time.” Brazilian mine operator

“2021 will certainly be on par with or better than 2019. Things will be settled by then.” Indian mine operator

On Structural Changes
“I think [traits] are overpriced relative to the market right now. Bayer [AG] has held trait licensing costs up despite the weaker commodity markets. Traits like RoundUp, VT Double Pro, VT Triple Pro and others I believe are significantly overpriced in this market.” U.S. multi-state seed company

“We have a lot of people working at home, using Zoom, Skype and Team connections. I can say that we have not lost any productivity. We may return to the office but on staggered days. There will be a lot fewer miles driven.” U.S. class I railroad executive

“I could see OSHA coming out with some level of social distancing regulations and construction therefore slowing down production. If you can only put so many people in a space at one time -- if I’m limited on the number of trades that can be working and how fast -- then there’s potential for some change in how we do our work.” U.S. nonresidential contractor

“We will probably see more use of remote operations, which could potentially enable us to reduce the amount of space we use. We’ve learned a lot. We can operate remotely fairly well, and that will reduce our dependence on real estate or cost. We’ll probably see less travel. Less dependence on large meetings and things like that for some time.” U.S. nonresidential contractor

“We’re projecting that we’re going to have reductions in the employee base. We’ve cut all nondiscretionary spending. We’re looking at all those types of budgets.” U.S. nonresidential contractor