COVID-19 Impacts by Industry

As we are continually monitoring the changing developments regarding the Coronavirus (COVID-19) pandemic, we are dedicated to keeping our clients informed on the latest impacts to various industries. Being part of the B. Riley platform gives us access to great insights from our sister companies, such as this one from Great American Group. The most recent impacts are listed below for the industries in: 

• Automotive
  
  
• Building Materials
  
  
• Energy
  
  
• Metals
  
  
• Retail
  
  

Automotive

Current Events

• Nissan suspends production in the UK because of supply chain disruption and demand reduction
• Ford suspends manufacturing in Cologne, Germany and Craiova, Romania starting Thursday
• US manufacturers reducing staff and allowing workers to self-isolate, thus reduced production
• US parts demand, while reduced, will continue for the short term
• GM, Ford, FCA and the UAW form a COVID-19 task force this week to strategize on US supply and employee health risks
• European Automakers start strategic plant shutdowns coordinated with country shutdowns. Renault has closed for approximately 2 weeks, VW has announced closures in Spain and Italy, and will continue with further European closures this week to eliminate worker contamination
• Daimler suspends European production as supply lines are disrupted
• Toyota has halted production in Europe because of government restrictions on the movement of people, supply chain disruption and falling sales
• BMW said the closure of its European plants and its factory in South Africa will last until April 19 as it copes with lower demand caused by the coronavirus outbreak
• US Automotive Leadership reflecting on strategic in-country sourcing for future programs

Short-Term Impacts

• New car vehicle inventory with the OEMs will sustain to satisfy sales demand, however it is expected as the US continues to constrain economic activity that demand will continue to fall and days of supply will conversely flatline or slightly increase
• GM has indicated it has supply covered through March, and for several OEMs, supply issues are not yet a concern
• FCA has some particular parts issues with Jeeps related to direct supply out of Wuhan, China
• Short term vehicle sales will affect overall yearly sales counts resulting in reduced annual volume and suppliers will need to adjust appropriately with capacity utilization

Potential Long-Term Impacts

• The new car sales trend has been running at 17 million units within the US for the last 5 years. Prior to the pandemic, the market had predicted a 7-10% pull back on volumes. The market expects to widen the annual volume gap to approximately a 20% reduction which will hit suppliers
• Aftermarket products will have a larger than natural lift in sales. When demand comes back on line, more people will move to rework their vehicles and provide needed service and updates
• US Automotive impacts are yet to be fully determined, but it is envisioned that new supplier strategy for in country parts supply will help boost manufacturing in the US long term

Indicators to Monitor

• Residual values of used off lease cars
• SAAR (seasonally adjusted average rate) of vehicle sales through automotive news and other outlets
• Tariffs on China
• Average miles driven
• Average age of used vehicles

Building Materials

Current Events

• City of Boston announced first suspension of construction activity (3/16)
• Mortgage applications declined 8.4% from the prior week according to Mortgage Bankers Association
• Lumber prices have declined from the prior week due to uncertainty in the wholesale and construction markets

Short-Term Impacts

• Chinese containment and quarantine efforts have contributed to material delays
• Homebuilder stocks Lennar and D.R. Horton dropped another 11.6% and 7.9%, respectively on 3/17
  Potential Long-Term Impacts
• Significant inventory buildup in the wholesale market due to prolonged reduction of demand from retail (HD, Lowes) and professional contractors
• Labor and driver shortage in the construction and logging industries

Indicators to Monitor

• US housing starts and permit applications
• Non-residential construction activity
• Lumber prices
• Chinese manufacturing activity
• NAHB Housing Market Index (Builder Confidence

Energy

Current Events

• Worldwide demand destruction as globe moves to contain virus. Immediate reduction in fuel demand
• Coincidental supply increase from OPEC and Russia as prior production curtailment agreement expires
• Oil and gasoline prices plummet to lows not seen since 2002

Short-Term Impacts

• Energy equities underperform market during selloff, continuing trend over the past few years
• Exploration and production companies reset capital budgets based on lower commodity prices, reduced cash flow forecasts
  

Potential Long-Term Impacts

• Borrowing bases determined by reserves (E&P) and current/fixed assets (OFS) move lower, reducing liquidity
• Exacerbated supply/demand imbalance as activity levels drop, increasing headwinds on fixed asset values

Indicators to Monitor

• Crude oil futures strip
• U.S. rig count
• E&P budget updates
• OPEC/Russia meeting updates

Metals

Current Events

• With Ford and GM announcing North American plant closings through March 19, 2020, service centers are starting to see some order cancellations
• Major steel mills continue to remain open and operating. Steel mill pricing for the near term is stable but demand reductions will likely pull prices lower
• Ferrous scrap – pricing remains firm for prime grades as the outlook for auto shred looks bearish. If industrial manufacturing shuts down the scrap in-flows to the mills will slow
• Ferrous scrap exports on both the West Coast and East Coast have slowed due to declining inflows particularly in Los Angeles, CA area ports and Seattle, WA. East Coast steel scrap #1 heavy-melt export yard buying prices dropped $15/GT to $195/GT in Philadelphia and $200/GT in New York
• LME Copper 3 month saw a sharp sell-off of 3.1% on March 16th and the contract price closed at $2.366/lb. on March 17th

Short-Term Impacts

• Suspended road construction in some cities and states while still providing critical functions and emergency maintenance as needed

Potential Long-Term Impacts

• More cities and states suspend construction activity with exceptions only for emergency repairs
• Layoffs of construction workers and idling of construction equipment

Indicators to Monitor

• Raw steel production and mill lead-times
• Ferrous scrap prices and ferrous exports

Retail

Current Events 

• Simon Malls announce full closure of all locations through 3/29, others expected to follow
• Foot traffic continues massive decline
• Companies drawing down full revolver value
• Critical retailers (grocery, pharmacy, supply companies) continue to see large comp increases
• Online retailers remain mostly open with shipping continuing

Short-Term Impacts

• Shut down increased pressure on liquidity (continued lack of guidance for public companies)
• Collateral Access difficult for shut down locations (bulk sale and transfers not possible)
• Inability to receive inventory and sell through zero
• Low margin retailers largest impact

Potential Long-Term Impacts

• Companies short on liquidity may not survive a longer shut down period, liquidation values difficult to achieve online and bulk only
• Supply chain lumpy inventory levels over the summer and fall
• Pent up demand for goods will accelerate shift to online buying habits

Indicators to Monitor

• Sales trend
• Margins
• Inventory Receipts
  
  

Any questions about this content should be directed to the author: Bill Soncini, Managing Director, Great American Group.