COVID-19 Daily Update: May 19, 2020

Although some governments are loosening or lifting lockdowns, countries’ borders remain largely closed as they aim to control their coronavirus outbreaks. Stressed supply chains have reawakened market observers to some inefficient systems and other manufacturing relationships that are strong but difficult to maintain. As economies suffer under the crisis with an uncertain recovery timeline, tensions are dividing international allies in the race for a vaccine.

The pandemic is upending world order, beyond disrupting and transforming daily life. After decades of liberalized global trade, an influx of protectionist policies may emerge in the post-COVID world.

“Global trade increased from under 40% of the world’s GDP in 1980 to over 60% today. Over the same period, the number of people living in cities more than doubled, to over 4 billion people today—more than half the world’s population,” Geoffrey Garrett, dean of the Wharton School at the University of Pennsylvania, wrote in a World Economic Forum article yesterday. “COVID-19 will reverse both of these trends, increasing the distance both between countries and among people. Some will laud these changes for increasing safety and resilience. But a world that is less global and less urban would also be less prosperous, less stable, and less fulfilling.”

After global trade fell 3% in the first quarter of this year, the coronavirus crisis could cause a 27% tumble in the second quarter, according to the U.N. Conference on Trade and Development organization.

Risks to agriculture supplies, food production, and processing chains have never been greater, according to S&P Global Platts. In March, global importers stocked up on wheat products, which ultimately pushed prices higher, while corn prices have plummeted to multiyear lows as the pandemic destroyed ethanol demand. Shutdowns of meat plants in the U.S. have stoked fears of a shortage across the country, while livestock depopulation in the short-term could have an outsized effect on long-term corn and wheat feed demand. Countries from Ukraine to India to Russia have enacted quotas or bans on certain exports, including wheat, rice, and other grains. Enforcing virus-containment measures, including social distancing and other safety protocols, has disrupted the world’s top agriculture producers from conducting normal operations.

Still, after declining in March and April, U.S. corn prices are showing signs of recovery, with ethanol consumption rising as states relax stay-at-home orders. In its short-term energy outlook report released May 12, the U.S. Energy Information Administration increased its forecast for ethanol production this year to an average of 870,000 barrels a day, up 6% from its April forecast of 820,000 barrels a day.

Growing tensions between China and other countries regarding the pandemic is weakening the trade outlook for the world’s most populous country. Market analysts told S&P Global Platts that the fourth quarter could see China facing a soybean shortage, as frictions build between the U.S. and the world’s largest soybean importer and Brazilian soy stocks diminish. China on average purchases 60% of its beans from Brazil and 30% from the U.S. annually, according to a customs report, and Brazil and the U.S. account for more than 80% of the world’s soybean supply. The mounting U.S.-China pressures over the management and origination of the pandemic jeopardize the countries’ trade deal signed at the start of this year. Meanwhile, Brazilian soybeans continue to set monthly export records and supplies could run out by the end of this year, said Peter Meyer, S&P Global Platts’ head of grain and oilseed analytics. Brazil surpassed the U.K. on Monday with the world’s third-highest total of confirmed coronavirus cases, and more than 90,000 people have died in the U.S., according to Johns Hopkins University data.

China and Australia’s dispute over mismanagement of the coronavirus crisis has pushed the world’s most co-dependent trading relationship to hang in the balance. China is Australia’s major commodities customer, while Australia relies on the Asian nation for tourism and foreign students. China said Monday that it will start imposing an 80.5% tariff on barley imports from Australia today. "It's a big blow to the barley industry and has caused quite a stir here," James Maxwell, manager at Australian Crop Forecasters, told S&P Global Platts, which also reported that China has taken additional measures, including warning that it might purchase African iron ore instead of Australian iron ore and Brazilian liquefied natural gas instead of Australian LNG.

Addressing the World Health Organization’s annual meeting yesterday, Chinese President Xi Jinping pledged $2 billion to the battle against coronavirus and said “China supports the idea of a comprehensive review of the global response to COVID-19 after it is brought under control, to sum up our experience and address deficiencies” that “should be led by science and professionalism, led by the WHO and conducted in an objective and impartial manner.” The U.S. has cut funding to the WHO. U.S. National Security Council spokesperson John Ullyot said “the Chinese Communist Party’s commitment of $2 billion is a token to distract” from international calls to further investigate how the crisis started and spread. WHO Director-General Dr. Tedros Adhanom Ghebreyesus said the organization “will initiate an independent evaluation at the earliest appropriate moment” to review “experience gained and lessons learned” from the response to COVID-19. “We’ve heard a lot of expressions about solidarity, but we haven’t seen very much unity in our response to COVID-19.”

Against this backdrop, the World Trade Organization has been seen as largely absent amid the pandemic. WTO Director-General Roberto Azevêdo announced on May 14 that he would step down a year before his term ends in September 2021. (He has operated in this role since 2013.) The organization will begin a process to select a new chief, instead of immediately appointing a deputy, which, according to commentators, will likely intensify international trade tensions.

Today is Tuesday, May 19, 2020, and here is today’s essential intelligence.

Uncertainty Across the Global Economy

Grocery retailers ramp up robotic grocery fulfillment strategy amid coronavirus

Major U.S. grocery retailers are increasingly turning to smaller, robotic fulfillment facilities to help them pick grocery orders faster and better handle the growing volume of online food deliveries spurred by the coronavirus crisis, experts say. Before the pandemic, grocers had been leaning toward investing in "microfulfillment centers." Experts say these facilities provide a scalable model for rapidly fulfilling thousands of grocery orders daily and are far more efficient than human workers who manually pick items in stores. The uptick in online grocery demand sparked by the virus in recent weeks has accelerated efforts by companies such as Walmart Inc. and Albertsons Cos. Inc. to automate the process with these high-tech centers.

—Read the full article from S&P Global Market Intelligence

Analysis: China could face soybean supply issues in Q4 on US-China tensions: sources

China—the world's largest soybeans importer and crusher—could face beans supply issues in the fourth quarter of 2020 due to the US-China tension over COVID-19 and dwindling Brazilian soy stocks, market analysts told S&P Global Platts. The Asian nation processes over 80% of imported beans into animal feed to fulfill its burgeoning domestic meat production and consumption needs. China is forecast to import 96 million mt of soybeans and crush in the domestic market 93 million mt, up 4% and 7.5% year on year respectively, in marketing year 2020-21 (October – September), as its livestock sector works to rebuild hog and sow herds decimated by the African swine fever epidemic in 2019, according to the US Department of Agriculture's May supply and demand report.

—Read the full article from S&P Global Platts

China's 80.5% tariff on barley imports from Australia not seen hitting wheat

China's move to impose an 80.5% tariff on imports of barley from Australia is not expected to make a massive dent in Australia's wheat export market, sources say. Some market participants in Australia were concerned after China announced the tariff on Monday. China has also suspended four major Australian abattoirs from selling red meat there. China's Ministry of Commerce said it would start imposing the tariffs from Tuesday, citing its investigations of imported barley originating in Australia point to dumping of cheap barley onto its market, which has led to substantial damage to the Chinese industry. The anti-dumping tax rate is 73.6%, while a countervailing subsidy margin of 6.9% has been also levied on the imports, according to the ministry. The import tax will be over a period of five years.

—Read the full article from S&P Global Platts

Future of Energy & Commodities

Watch: Market Movers Europe, May 18-22: The commodity complex starts to move out of lockdown

In this week's highlights: Prospects of a modest oil price recovery in the coming months are growing; how low can European gas prices go? US crude is set to be delivered to Belarus; and updates on French nuclear power availability will be closely monitored.

—Watch and share this Market Movers video from S&P Global Platts

US shale oil output decline set to accelerate in June by 197,000 b/d: EIA

Declining US shale oil output is projected to slide further in June by 197,000 b/d to 7.822 million b/d, a drop of 15,000 b/d compared to what was expected last month, the US Energy Information Administration said Monday. Last month, the EIA forecast production to drop 183,000 b/d in May to 8.526 million b/d, but voluntary shut-ins by producers during the past several weeks have accelerated faster than expected. Well economics have gone south in the wake of extremely low oil prices, and the majority of public and several private operators revealed in the last few weeks that they have curtailed at least some output.

—Read the full article from S&P Global Platts

Air travel takes back seat to road trips in the summer of coronavirus: Fuel for Thought

It has become something of a cliché to say that the coronavirus pandemic will change the way we live – forcing our societies to rethink everything from voting to education – but that doesn’t make it any less true. For traders and brokers in the oil patch, changes to travel habits are front of mind, with domestic road trips likely to supplant international air travel as the preferred way to vacation this summer. This is a major U-turn from recent years, when a growing global economy and rising personal incomes, especially in Asia, had passenger airlines moving more tourists around the world than ever before.

—Read the full article from S&P Global Platts

ESG in the Time of COVID-19

China green bond issuance rebounds after falling to lowest in over 3 years in Q1

China's issuance of green bonds in the first quarter fell to the lowest level in more than three years amid the pandemic disruption, although the volume started recovering in April. In the first three months of 2020, China issued $2.32 billion worth of green bonds, less than a fifth of $13.06 billion in the previous quarter and about a third of $7.59 billion a year earlier, according to Climate Bonds Initiative, or CBI, a U.K. research firm. The first-quarter issuance was the lowest since the second quarter of 2016, when China issued only $1.03 billion worth of green bonds, CBI said. China is one of the world's largest green bond issuers, as it builds its war chest to fund its emission reduction efforts. Local commercial banks remained the leading issuers of such bonds in the first quarter, according to CBI.

—Read the full article from S&P Global Market Intelligence

Lawmakers urge Dominion to 'further expand' clean energy, efficiency investments

Dominion Energy Virginia plans to add nearly 24,000 MW of renewables and storage to its generation mix over the next 15 years to prepare for a cleaner energy future, but legislators behind a landmark Virginia law believe the utility needs to do more. The Dominion Energy Inc. subsidiary, known legally as Virginia Electric and Power Co., in its 2020 integrated resource plan, or IRP, laid out plans to add about 5,100 MW of offshore wind, nearly 16,000 MW of solar and about 2,700 MW of energy storage to its portfolio through the end of 2035.

—Read the full article from S&P Global Market Intelligence

Biden plans to rescind Keystone pipeline permit if elected, campaign says

If elected in November, former Vice President Joe Biden's administration would rescind a federal permit for the Keystone XL oil pipeline, according to his campaign. "Biden strongly opposed the Keystone pipeline in the last administration, stood alongside President [Barack] Obama and Secretary [John] Kerry to reject it in 2015, and will proudly stand in the Roosevelt Room again as president and stop it for good by rescinding the Keystone XL pipeline permit," Stef Feldman, policy director for Biden's campaign, said in a statement. The statement marks the first time Biden's campaign has commented on how the Democratic Party's presumptive nominee would address the controversial project, according to Politico.

—Read the full article from S&P Global Market Intelligence

Listen: Can Congress find room for fossil fuels and green incentives in stimulus talks?

The US House of Representatives has passed the $3 trillion HEROES stimulus package with barely a mention of the energy sector. The legislation is going nowhere in its current form after Senate Republicans dismissed it out of hand and President Donald Trump promised to veto it. So where is the financial aid that the White House promised the oil and gas sector? Kevin Book, managing director of ClearView Energy Partners, tells us how Republicans and Democrats might find energy-sector tradeoffs to include in a future compromise stimulus package. He and host Meghan Gordon spoke about the fate of the administration's efforts to fill the Strategic Petroleum Reserve. They look at who came out ahead in the 2015 tradeoff that opened the door for US crude exports. And Books talks about how the November election is looming over these negotiations in Washington.

—Listen and subscribe to Capitol Crude a podcast from S&P Global Platts

Banking Sector Under Pressure

Pandemic may force GCC banks to cut dividends, drive future M&A

Banks in the Arabian Gulf could be forced to scrap 2020 dividends as profits plunge in 2020 due to coronavirus, which could also drive consolidation in the longer term, analysts said. The region's lenders are unlikely to require additional capital should loan defaults soar, despite facing headwinds related to the impact of COVID-19 and lower oil prices. The 23 banks in the Gulf Cooperation Council, or GCC, that S&P Global Ratings covers had assets totaling $1.5 trillion at 2019-end and can absorb up to $36 billion in extra provisions before their capital bases start to erode, according to the rating agency.

—Read the full article from S&P Global Market Intelligence

Russia's biggest banks claim they can handle pandemic without state support

Sberbank of Russia is confident it can navigate the impact of the coronavirus, despite the central bank warning that the health of the country's banking sector could worsen toward the end of 2020. Russia is one of the countries worst affected by the pandemic, having recorded almost 282,000 infections and 2,631 deaths due to COVID-19 as of May 17, official government data shows. Both Sberbank and VTB Bank PJSC, Russia's two largest banks by assets, claim they will not need state support.

—Read the full article from S&P Global Market Intelligence

More US banks disclose exposure to stressed retail industry in Q1 filings

U.S. banks continued to report exposure to the hard-hit retail industry in first-quarter filings. The type and granularity of disclosures varied, with some banks reporting an all-inclusive commercial retail value and other banks reporting certain portions of their exposure. Amerant Bancorp Inc., Independent Bank Group Inc. and Hope Bancorp Inc. disclosed significant proportional exposure to commercial retail in the first quarter, according to S&P Global Market Intelligence data.

—Read the full article from S&P Global Market Intelligence

Insurance In Need of Assurance

Insurance M&A Deal Downturn Likely To Persist Through Balance Of 2020

The onset of the COVID-19 pandemic quickly eroded the optimism about prospects for M&A activity among insurance carriers and distributors that had previously been accelerating. S&P Global Market Intelligence projects a dramatic slowdown in key measures of volume of carrier and broker/agency deals through the balance of 2020. Prospective acquirers are aggressively managing liquidity and will subject potential targets’ balance sheets to intense scrutiny. Previously routine deal-making functions face logistical challenges as well due to broad stay-at-home restrictions across geographies.

—Read the full report from S&P Global Market Intelligence

COVID-19's Economic Effects Cloud The Outlook For EMEA Insurers

For most primary insurers in Europe, the Middle East, and Africa (EMEA), insurance losses linked to the COVID-19 pandemic are forecast to be limited; the exception will be insurers writing industrial lines, such as event and directors and officers (D&O) insurance. Losses in these lines, plus travel and, in some cases, business interruption insurance, will largely be incurred by EMEA-based global reinsurers. During 2020, S&P Global Ratings expects most rating actions in the insurance sector to be caused by the erosion of unrealized gains on investments weakening balance sheets. Profitability will suffer because of top-line pressure and modest claim frequency, combined with impairments on investments and receivables because there are more corporate defaults. The return of quantitative easing will compress life insurers' investment margins further. We have lowered our long-term interest rate assumptions for 2020-2023.

—Read the full report from S&P Global Ratings

COVID-19 Pushes Global Reinsurers Farther Out On Thin Ice; Sector Outlook Revised To Negative

Pandemic-related losses, combined with volatile capital markets, and lower investment returns, will likely prevent the global reinsurance sector from meeting our earnings expectations for 2020. Once again, the sector will not earn its cost of capital this year, bearing in mind it has struggled in the past three years to do so due to large natural catastrophe losses and fierce competition. S&P Global Ratings now assumes the global reinsurance sector will deliver a combined ratio of 101%-105% in 2020, or more if global insured COVID-19 losses accelerate beyond $30 billion for the wider (re)insurance sector. Therefore, S&P Global Ratings is revising our sector outlook for global reinsurance to negative from stable, as we believe business conditions are becoming increasingly more difficult. S&P Global Ratings expects to take negative rating actions on reinsurers whose COVID-19 losses wipe out their earnings and become a capital event and that in our view won't be able to sufficiently rebuild capitalization over the next 12 to 24 months, as well as for those reinsurers that entered 2020 with an already historical weaker operating performance. That said, property/casualty reinsurance pricing is hardening, life reinsurance earnings remain stable so far, and capital for the sector remains robust, though lower, than at year-end 2019.

—Read the full report from S&P Global Ratings

Written and compiled by Molly Mintz.