Planning for recovery

5 min read

Chemicals

This is the latest weekly update from Santander’s chemicals team on how the coronavirus pandemic is affecting our clients and the sector as a whole.

Chemicals

MakeUK’s latest report on the manufacturing sector reveals that the chemical industry’s performance in the second quarter was hit hard by the coronavirus crisis. It has also proved more resilient than other sub-sectors. In part, this reflects the Government’s decision to ease regulations so that certain companies were able to bring new products to market more quickly to meet urgent short-term demand. See below for more details.

The industry is now focusing on recovery. The Chemical Industries Association (CIA) council meeting on 11 June discussed the way forward. Plotting a path is challenging, not least because while many CIA members have continued to operate throughout the pandemic, firms’ recovery prospects depend on their customer industries. Automotive and aerospace customers, for example, are still struggling while sectors such as pharma and cosmetics are performing more strongly.

The CIA’s plans focus on the sector’s short-term needs over the next three months, which includes the economic stimulus that might persuade consumers to spend. Then the medium-term needs over the next six months, such as a successful Brexit agreement. And finally, the longer-term plans looking at the next 12 months and beyond, such as investment in reshoring for resilience where this is appropriate.

On the short-term needs, the CIA is one of several industry bodies to be discussing with the Government how to encourage consumers to spend. This will be key to recovery. While consumer-facing businesses in areas such as automotive are now reopening, this is no use unless consumers decide to make purchases.

Meanwhile, the CIA is also conscious of other challenges. Its council meeting also discussed the need for the UK to reach an agreement on the future shape of its relationship with the European Union. The CIA and other European national chemical associations are advising the Government on the importance of regulatory cooperation, setting out a series of detailed points to help them deliver this.

Another focus for the sector is resilience. We understand government taskforces are being commissioned to address both the capacity of UK manufacturing directly related to pandemic response (such as personal protective equipment manufacture and production of pharmaceutical ingredients). Plus, the capacity as it relates more broadly to the economy, national infrastructure and industrial chemicals. We plan to provide input on both fronts, reflecting our longstanding concern about the offshoring of key areas of production over the past decade or so.

 

Manufacturing sector news

While the UK is now moving out of lockdown, it’s difficult to know how quickly economic activity will recover. The experiences of other countries may be instructive in this regard. In China, for example, the latest data shows that factory output accelerated last month, with industrial production up 4.4% in May compared to 3.9% growth in April. This disappointed some commentators, who had been predicting growth of around 5%. It may reflect lower consumer spending than expected. It will be interesting to see whether that pattern is repeated in the UK now non-essential shops have been allowed to reopen in England.

Manufacturing Outlook 2020 report

Against this backdrop, MakeUK has published its Manufacturing Outlook 2020 report for the second quarter of the year. The report, available in full here or as a graphical summary above, follows the historic falls seen in economic growth during the pandemic. It warns output has plunged to its lowest level in the 30 years that MakeUK has been doing this research. And the report warns of further difficulties to come. Key findings include:

  • output has fallen to a 30-year low, surpassing the declines seen during the global financial crisis
  • UK and export orders are at lows comparable to the financial crisis
  • employment and investment are suffering from significant cuts
  • only 10% of companies are operating at full capacity
  • manufacturing is expected to contract by almost 10% in 2020.

It now seems like a long time since the first quarter, when many manufacturers were reporting strong results and increasing optimism, with plans for significant capital investments in long-term projects. MakeUK’s report makes it very clear this optimism has been completely undone by coronavirus.

Moreover, this is a consistent picture nationwide. The typical experience during economic downturn is that businesses in London and the south-east remain more confident than the rest of the UK. But MakeUK’s report suggests the impact of the pandemic has been indiscriminate, impacting the entire manufacturing base. Irrespective of region, many businesses are concerned about the likelihood of a significant recession.

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