JIANGCHUAN

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07

2020

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02

In depth interpretation, what is the impact of the epidemic on the chemical industry?

Author:


At present, the number of confirmed cases of new pneumonia is still rising. At 2:30 a.m. on January 31, the World Health Organization announced that the novel coronavirus epidemic was listed as a public health emergency of international concern.
But the World Health Organization also emphasizes that there is no need to take measures to restrict international travel and trade, and it does not recommend measures to restrict travel and trade.
What impact has the epidemic had on the Chinese economy?
On the one hand, the offline service industry is the first to be greatly affected, especially the cinema line, tourism industry, accommodation and catering, offline education, and so on. On the other hand, the outbreak of this epidemic occurred at a special time point, which also had a significant impact on industrial production activities.
For this reason, the author conducted research on industries such as clothing, steel, machinery, and petrochemical, involving Guangdong, Hubei, Zhejiang, Shanghai, Hebei, and other places. The situation varies in different industries and regions, but overall, industrial production is affected to varying degrees in terms of labor, orders, inventory, production, transportation, and other aspects. Unlike the service industry, which is mainly impacted by demand, industrial production activities are also impacted by both supply and demand, making the situation even more difficult. Under the impact of the epidemic, the contradiction between supply and demand in industrial production activities is very prominent.
Short term difficulties faced by industrial production recovery
The escalation of the epidemic occurred before the Spring Festival, making employee return to work a prominent issue. Overall, the current recovery of industrial production activities generally faces the following short-term difficulties:
Firstly, industrial production activities may be passively delayed due to limitations on resumption time, actual employee rework situation, protective standards and material conditions during resumption of production.
To effectively prevent and control the spread of the epidemic, various provinces and cities have issued notices on the resumption of work for enterprises. The requirements for resumption of work in various regions should generally not be earlier than 24:00 on February 9th, among which Hubei Province requires various enterprises to resume work no earlier than 24:00 on February 13th. Therefore, the main industrial activities have been postponed by at least 9 days compared to the original Spring Festival holiday. Although various regions have made arrangements that are "no earlier than", the actual construction situation in certain regions still depends on the progress of epidemic prevention and control, and there is a certain degree of uncertainty.
Due to the ongoing spread and prevention of the epidemic, employees' actual willingness to return to work is not strong. From the national railway passenger volume on the fifth day of the 29th and the sixth day of the 30th, the passenger volume decreased by 74.7% and 73.8% respectively year-on-year. The return of migrant workers will be delayed, coupled with the necessary 2-week quarantine period. Therefore, the actual rework time for migrant workers may be delayed by 2-3 weeks, and in some regions, the delay may be longer. Furthermore, even if non local employees return to their positions, how can isolation arrangements be made for non local employees? Can sufficient protective materials such as masks be provided for resumption of production employees? What prevention and control standards and event handling procedures should enterprises follow during the initial resumption of production? These are all practical problems that resumption of work enterprises need to face. Especially for large labor oriented enterprises, the above issues are more prominent.
Secondly, the current transportation and logistics channels are facing obstacles.
In order to control the epidemic, it is necessary to carry out channel control and temperature monitoring work on highways, but there are also some places where roads are closed, blocked, and even excavated. The county government in a certain area also ordered the closure of inter county entrances and exits on national, provincial, county, and township roads. On the other hand, logistics capacity has also been affected by the extended holiday of transportation companies (with many uncertain when to resume work).
According to Mysteel statistics, as of January 30th, the total inventory of 22 construction steel companies in a southern province was 1.375 million tons, an increase of 379000 tons compared to the first week of inventory after the 2019 Spring Festival. The main reason is that logistics are hindered, causing goods to be unable to be transported normally, inventory is rapidly accumulating, and some raw materials in transit are currently piled up at the port for unloading.
Thirdly, there will be delays in the delivery of manufacturing orders after the year, and production enterprises will face losses.
In February after the Spring Festival, seasonal products such as clothing will experience a peak of rush and shipment. However, due to the aforementioned factors, the production recovery process is delayed and the delivery time is currently difficult to determine, resulting in delays for many orders. As a result, production companies will face deductions or be forced to adopt expedited or air freight methods to deliver orders as soon as possible, but this will also result in higher delivery costs. Especially in the export industry, delayed order delivery may face greater losses.
At the same time, manufacturing enterprises have accumulated high orders in hand before the Spring Festival, which will put greater delivery pressure on them. From November 2019 to January 2020, the PMI new orders and new export orders index both rose. Due to the time limit of PMI investigation, the January PMI data basically reflects the situation before the epidemic escalated. In January 2020, the PMI new order index reached 51.4, a new high in 20 months. Meanwhile, although new export orders fell to 48.7 in January, they were significantly higher than the same period in early 2019 and the full year level in 2019. At the same time, from the cumulative perspective of December and January, the performance of new export orders is also relatively strong. And it is precisely these in hand orders that may exert significant pressure on delivery and even bring certain losses.
The new order index strengthened at the end of last year and the beginning of this year
Data source: National Bureau of Statistics, January 31, 2020
The impact of the epidemic on industrial production may exceed the first quarter
The impact of the epidemic on production activities is one-time and temporary. But how long is this' temporary '? The author believes that its impact may exceed the first quarter, and this possibility needs to be noted. From the perspective of the first quarter itself, the main impact of the epidemic on economic activities will be reflected in demand shocks in the service industry. The impact on the manufacturing industry will not only be reflected in demand shocks, but also in supply shocks.
So, why may the economic impact of the epidemic extend beyond the first quarter?
Firstly, the temporary loss of new orders in the export manufacturing industry may continue the impact of the epidemic into the second quarter.
From the data since January 2005, it can be seen that March and April after the Spring Festival are the peak periods for export orders during the year, and both are significantly higher than the Christmas orders in September, the third peak. 3. In mid April, the average order index in March was the highest. It can be seen that the performance of export orders in March and April will determine the export performance in the following months.
March and April are the peak months for new export orders: PMI new export orders
Data description: Based on data from January 2005 to January 2020
Data source: National Bureau of Statistics, January 31, 2020
At present, foreign buyers are highly concerned about the Chinese epidemic. Due to the aforementioned reasons, the delivery time of orders at the beginning of the year is currently uncertain, and there may even be a certain proportion of delays. If there is still uncertainty regarding the recovery of industrial production capacity in March, it may have a certain degree of impact on new orders for that month, which in turn will affect production activities in the following two quarters.
The concerns about order loss vary among different enterprises and industries. For enterprises with strong international competitiveness, this concern is not obvious. However, for clothing companies, foreign buyers may place orders in multiple countries at the same time. If production recovery in China is delayed, it may affect the order configuration direction of foreign buyers.
In addition, although the World Health Organization does not recommend measures to restrict travel and trade, some countries have already taken restrictive measures and increased their risk levels. This may also have a negative impact on China's new orders. For example, foreign suppliers need to consider adding a Chinese enterprise as a supplier, which requires preliminary negotiations, product testing, factory inspection, sampling, negotiation, and signing of contracts. The above multiple links involve international travel by foreign buyers to China. At present, the negotiation process of adding Chinese enterprises as suppliers may be disrupted or even face suspension, which may affect potential export order growth.
Secondly, fixed expenses of industrial enterprises remain unchanged, production difficulties increase, and the pressure on the capital chain worsens.
Firstly, during the period of delayed resumption of work and isolation of employees from other places, enterprises still face fixed expenses such as rent and loan interest. Secondly, do companies need to pay wages during the extended resumption period? Standards vary across regions, with some companies still having to pay wages. For example, the "Notice on Delaying the Resumption of Shanghai Enterprises and the Opening of Schools" issued by Shanghai on January 27th clearly states that "for employees who rest, enterprises should pay wages according to the standards stipulated in the labor contract. Thirdly, for patients with novel pneumonia, suspected patients, and close contacts who are unable to provide normal labor due to isolation measures such as isolation treatment and observation, enterprises should also "treat them as providing normal labor and pay employees normal working hours wages".
At the same time, we have also noticed that the funding chain of private industrial enterprises is generally in a tight state. According to the latest data from the National Bureau of Statistics, in November 2019, the amount of notes and accounts receivable of private industrial enterprises reached 5.025 trillion yuan, a year-on-year growth rate of 32.3%, which is also the highest year-on-year growth rate since 2007. During the same period, the average payback period for accounts receivable of private industrial enterprises reached 44.6 days, which has eased from the peak in 2019, but is still at a historical high.
It can be seen that the funding chain of private industrial enterprises is already in a tense state. In addition, fixed expenses remain unchanged, and the additional labor costs, delayed resumption of work, delayed order delivery caused by the epidemic, as well as increased protection costs for resumption of production during the epidemic prevention and control period, these difficulties will have a significant impact on previously struggling enterprises. If the capital chain of these enterprises breaks, it may lead to bankruptcy and increased unemployment, which may affect the subsequent economic trends. The above situation requires attention and thorough evaluation.
The funding chain of private industrial enterprises is already relatively tight
Data source: National Bureau of Statistics, WIND Data Terminal, January 31, 2020
Ensure the connection between epidemic prevention and control and the resumption of production
Undoubtedly, epidemic prevention and control remains the most important task at present. On the premise of ensuring epidemic prevention and control, arrangements and deployments should be made in advance for production recovery to reduce the mid-term impact of the epidemic, and the connection between epidemic prevention and control and production recovery should be done well. Therefore, the author's suggestion is to first stabilize the flow of funds, restore logistics as soon as possible, and then restore the flow of people based on the improvement of the epidemic, while resuming production activities.
Firstly, stabilize the flow of funds.
Targeted tax reductions and temporary short-term financing should be used to provide working capital for difficult enterprises in industries that have been hit by the pandemic. Especially for private enterprises that have fallen into difficulties due to the impact of the epidemic, we need to help them stabilize their funding chain and overcome temporary difficulties.
Secondly, resume logistics as soon as possible.
At present, the contradiction between supply and demand in the market is prominent, with both surplus and shortage coexisting. In this context, policies should not be used as a total stimulus, but should focus on "smoothing" the supply and demand relationship. The key link to connecting supply and demand is smooth logistics. Therefore, clear standards should be established to ensure smooth transportation infrastructure. At the same time, we attach great importance to the crucial role of the logistics and transportation industry. While adhering to epidemic prevention and control standards, the logistics and transportation industry should resume work and normal operation as soon as possible. In addition, it is not advisable to implement a large-scale total volume stimulus until the epidemic is fully controlled and logistics bottlenecks are fully resolved.
Once again, resume the flow of people and production activities.
The government should strengthen communication and mutual understanding with enterprises to stabilize their expectations of resuming work. Especially, the government should understand the difficulties faced by enterprises and take corresponding measures based on the characteristics of different industries and local situations.
Due to the ongoing development of the epidemic, it is not yet possible to determine the specific resumption time in some areas. However, certain technical standards can be provided, based on the number of new cases, population mobility, and epidemic prevention situation in the local area. Clear and quantifiable resumption conditions can be provided, providing reference expectations for enterprises to resume production. In situations where the epidemic has not yet been completely resolved, local governments should also clarify protective measures after resuming production. In the event that the epidemic is not completely resolved, the government should guide enterprises to provide necessary protection for employees and provide sufficient market supply of protective equipment for enterprises.

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