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INSIGHT: A Strong Recovery Could Hurt Supply Chains

August 3, 2020
Market participants are hoping for demand to recover from the bottom reached in April and May. But a sudden increase could hit cash flows and disrupt supply chains.

Demand for engineering resins and other plastics markets is slowly recovering from the lows reached during lockdowns. Activity across most downstream markets increased since economies across Europe eased restrictions. The worst-hit and one of the most important sector, automotive, is also showing signs that it is recovering. Total volumes, however, across most segments remain below last year’s levels.

While a recovery is welcome, there is worry that a strong one could cause disruptions.

When companies were forced to drastically reduce operations in April and May, for many of them cash was not a big issue. This is because, especially for the automotive industry, invoices are settled after 120 days. As such, many businesses kept receiving payments even when activity was heavily reduced. But, as expected, they are now feeling the impact of the shutdowns in April and May on their balanced sheets.

The current slow recovery in demand is probably the best scenario for many companies that have had to drastically reduce operations.

Cash flow issues

But, should demand start to recover strongly, the big reductions in receipts during lockdowns could leave many in trouble . This is especially related to the auto industry, for polymers such as acrylonitrile butadiene styrene (ABS), polycarbonate (PC), and especially nylons (PA6/PA6). The lack of cash will make some vulnerable to source high volumes of raw materials. In such a scenario, they will risk losing business to their competitors or will not be able to satisfy demand. The latter is more problematic as it could lead to severe supply chain disruptions for the industry. It is even more problematic for the auto industry because stringent specifications make it hard for buyers to switch suppliers.

We are worried that a strong increase in demand for our products could cause us issues.

Buyer at a European Compounder

However, some of the smaller critical suppliers that have run into problems have been helped by their bigger partners. But since most companies of all sizes have suffered during lockdowns, there is a limit on how much companies can help each other. In fact, some are even asking for cash in advance for fear of bankruptcies.

While demand is moving in the right direction, also for automotive, the road to bringing operations back to pre-pandemic levels is not simple for many participants. And for now, a gradual recovery is probably the best outcome for many players.

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