SPECIAL REPORT: Canada, plastics & COVID-19
More than just a humanitarian crisis, the COVID-19 pandemic is causing global economic disaster, as the virus domino toppled supply chain lines and shuttered factories in China, Europe, and then worldwide. And Canada’s plastics industry isn’t being spared the effects.
May 13, 2020 by Canadian Plastics
In his 1922 poem “The Waste Land,” T.S. Eliot famously described April as the cruelest month. But what was poetic license nearly 100 years ago is harsh reality today. April 2020 will be remembered for a long time to come as the month when the COVID-19 pandemic became life-changing for most of us.
Lockdowns, border closures, and strict social distancing requirements have turned daily life upside down, and the world economy – which was rosy just three months ago, with the International Monetary Fund forecasting income growth on a per capita basis for most nations – is now projected to suffer its worst year since the Great Depression of the 1930s.
And manufacturing is a major part of most of these economies, accounting for nearly 16 per cent of the global GDP in 2018. Due to the epidemics of COVID-19 across the globe, the manufacturers of such major industries as automobile, chemical, electronics, and aircraft are facing concerns regarding the availability of raw materials. In Asia-Pacific, China is mostly affected by the condition, due to the fall in industrial production coupled with the shutdown of factories. At the peak of Chinese efforts to control the COVID-19 outbreak, factories making 80 per cent of Chinese exports were shuttered.
In Europe and North America, factories were among the first to feel the effects of the deadly virus, as supply lines from China were disrupted. Production and factory employment fell sharply as the pandemic weighed on the factory sector. In the U.S., new orders hit their lowest level in 11 years. Some large auto plants have shut down altogether in an effort to protect workers; some, like General Motors and Ford Motor Co., are retooling to make ventilators. Other non-automotive manufacturing plants continue to operate, but social distancing can pose challenges in a factory environment. And with hundreds of millions of North Americans under orders to stay home, demand for big-ticket items has suffered.
The price of oil has fallen significantly due to a decrease in demand for petroleum products used in transportation and a price war between Saudi Arabia and Russia. Although chemical production is deemed critical in the fight against the pandemic, auto manufacturing is a major outlet for chemical production, which is why some chemical makers see a significant slowdown in business ahead. “Polymers highly exposed to the transportation segments are being hit hardest by the pandemic, with polyamides topping the list as about half of PA66 demand comes from auto sectors,” market research firm Wood Mackenzie said in a recent report. Some chemical makers have already closed plants; others are delaying building projects in a bid to preserve cash and/or guarantee the safety of construction crews. In mid-March, Calgary-based Nova Chemicals Corp. paused construction on its new Corunna polyethylene site near Sarnia, Ontario, although work was resumed in mid-April. “We’re keeping these workers, as well as all our site-critical workers, safe with enhanced protocols,” said Nova president and CEO Todd Karran.
On the flip side, chemical companies across the globe have ramped up efforts to combat the pandemic, providing the basic raw materials to the producers of health, hygiene, and safety products such as face shields, sanitizer, disinfectants, and other cleaning products. “PET resin is an obvious winner, here,” the Wood Mackenzie report said. “Polyethylene, polypropylene, and polystyrene are also likely to be supported through robust packaging demand.” As one example of many, Cincinnati, Ohio-based additive supplier Baerlocher USA is seeing rising orders. “We’ve witnessed a significant increase in orders for plastic materials such as films used for food and e-commerce packaging, as well as for medical device applications,” company officials said.
INTO THE ABYSS
Here at home, the pandemic threatens to plunge Canada’s economy into the abyss. Like nearly every other nation on the planet, Canada has put its economy into an induced coma, and the result may be an historic downturn. At the Big Five banks, the average forecast among economists as of the end of March was for Canada’s economy to shrink by nearly 23 per cent in the second quarter on an annualized basis, twice what they predicted less than two weeks earlier. Others forecast an even deeper drop – Capital Economics expects a contraction of 35 per cent.
Oil development projects such as the Bay du Nord project off the coast of Newfoundland and Labrador have been put on hold. On the manufacturing side, major auto companies in Ontario have temporarily halted production to ensure the safety of their workers, but also in response to weaker global demand. Canadian auto parts supply giant Magna International Inc., of Aurora, Ont., withdrew its 2020 forecast amid the COVID-19 pandemic, reduced or suspended operations in many of its facilities – beginning with its China plant – and shifted production to make masks instead of seating at plants in Mexico and Europe. Elsewhere in Canada, other companies have ceased operations.
It’s a devastating turn of events for the plastics industry, which entered the new decade on a definite high – North America had a new trade pact in place, the U.S.-China trade war was nearing resolution, concerns over the fallout of Brexit had subsided, and demand expectations had improved following a lacklustre 2019. That said, the manufacturing sector overall may be somewhat less affected by the COVID19 crisis than other sectors because manufacturers are able to build inventories. And for Canada’s plastics sector, the damage is potentially even less because most, if not all, of these companies have been declared essential service providers under the guidelines of all of the provinces.
But it’s certainly not business as usual. To begin, companies with manufacturing plants must follow guidelines for industry operators that set out screening, social distancing, and cleaning and sanitizing practices, plus additional precautions that can vary from one province to the next. For Brantford, Ont.-based straw maker Stone Straw, some the new guidelines are a heightening of procedures that were already in place. “Stone has always followed food production guidelines, so we’ve always had a hand sanitizing program in effect and we’ve always kept our machines sanitized on a daily basis, so some of the guidelines haven’t been a big adjustment for us,” said Abe Looy, the company’s regional operations manager. But others were more of a challenge. “We now take temperature checks on all our employees before they enter the plant, which takes time; and we’re not bringing in contractors unless it’s absolutely necessary, and we’re doing health screens on them if we have to let them in,” Looy said. “Inside our plant, we’ve redesigned our cafeteria for social distancing, limited the number of people allowed on breaks at the same time, and our employees wear face shields when social distancing can’t be maintained.”
And even companies that had taken steps to prepare for a healthcare crisis have been caught off guard. “We put a pandemic plan in place after the SARS outbreak ended in 2004, but COVID-19 developed so quickly that we weren’t able to benefit from it,” said Jerome Romkey, president of Chester, N.S.-based machinery maker GN Thermoforming Equipment. Two of the company’s biggest COVID-19 adjustments, Romkey said, were to preserve physical distancing on the production floor and to satisfy heightened cleaning and sanitizing guidelines. “We’ve now split our one shift into two shifts to spread out our workforce, and cleaners come in several times a day to sanitize high-touch areas of the plant,” he said. Following the lead of companies in tech and other industries, most plastics processors and equipment makers are telling non-factory employees to work remotely.
The overall system being used by W. Amsler Equipment Inc., a blow molding machinery maker headquartered in Bolton, Ont., is probably being used by most firms. “All of our sales staff and IT and engineers are working remotely,” said sales and marketing manager Heidi Amsler. “Key personnel who have to come in every day are segregated in separate offices, and we’ve readjusted our factory and scaled back the number of people on our plant floor to allow for social distancing. And we’re prohibiting nonessential visitors.”
HITS AND MISSES
Both in Canada and beyond, the impact of the pandemic on demand for plastic goods has been nuanced. Processors with the most exposure to the transportation and restaurant segments have been hit hardest, while soaring demand for healthcare products and frenzied consumer buying of necessities as lockdowns took effect in different regions have bolstered other product makers. “We’re currently running regular shifts, but not full staff,” said Abe Looy. “Our business is typically seasonal and we should be running full bore right now, but we’re at only about 50 per cent capacity and new orders are slowing down by about 50 per cent. Restaurants are closed and there’s not a lot of demand for takeout, and this is where we’re getting hit.”
Other companies haven’t seen a slowdown. “Most of our customers are in the food packaging industry and their businesses are still strong,” Jerome Romkey said. “We still have a lot of orders to fulfill for our thermoformers, so we’re continuing production at a near-capacity rate.” Plastic Molding Manufacturing (PMM), a Hudson, Mass.-based injection molder with five plants in five different U.S. states, is currently open at all of its locations and operating at full capacity, primarily to service its customers in the healthcare sector like GE Healthcare and Boston Scientific. “Our involvement in automotive molding has slowed down, but our medical and consumer business is stronger than ever,” said PMM’s CEO George E. Danis.
For many of Canada’s plastics processors, as well as counterparts in the U.S., one of the most immediate challenges of the pandemic revolves around supply chain disruptions. Given the global and complex nature of sourcing, many machinery and parts makers are having difficulty accessing and delivering material. Border controls have tightened, leading to lengthy logistics delays. Current delays in goods arriving into Canada from the U.S. – which used to happen virtually overnight – are bad enough, but shipping containers from China are now being delayed by many weeks, even months, since the Chinese trucking industry is not operating at regular capacity and may not be for weeks to come.
By revealing that the globalized supply chain that brings us many of our products is shockingly fragile, the pandemic is highlighting a problem that many have been concerned about – and warning against – for years. George E. Danis, for example, has long advocated and encouraged the reshoring of manufacturing to the U.S. and Canada, and believes the case has been made ironclad by the pandemic. “Reshoring has been PMM’s objective since the 1990s, when manufacturing was leaving the U.S.,” he said. “It’s the only way for manufacturing to succeed, and I think more people are now realizing this. We can’t depend on overseas manufacturers to supply us with healthcare equipment and medical supplies during emergencies because the delivery times are far too long. There’s no denying the importance of the industry and businesses bringing back their products from offshore or retooling in North America.”
Others agree, and suggest this may be one of the lasting legacies of the pandemic. “I think in Canada and the U.S., there will be a re-evaluation of the supply chain, and the need to onshore critical manufacturing,” said Peter Fitzgerald, general manager of automation supplier Fanuc Canada Ltd. in Mississauga, Ont. “The need to have better control and access within country borders for critical parts has been made very clear by personal protective equipment shortages. A supply chain has many links, but if one link is missing then the whole thing breaks down, and the pandemic has shown that this can happen very quickly.”
THE SHAPE OF THINGS TO COME
As of late April, the pandemic is far from over, but there are signs the world is inching toward a new phase in the crisis. Countries like Singapore and Japan are now tightening measures to prevent a surge in infections, while Italy, Spain, Belgium, Vietnam, New Zealand, and others have moved toward ending their shutdowns, and China has reopened many businesses. Reflecting this divide, two opposing arguments are taking shape, with those on one side saying that restarting businesses is important for a nation’s social well-being and for generating much-needed tax revenue, and those on the other who argue that reopening too soon risks a second wave of infections and a far greater negative economic impact.
And the debate about what the recovery will look like is also moving to the forefront. Economic analysts are divided primarily between those who expect either a V-shape or a U-shape recovery for the global economy, although some are predicting a W- or L-shape. In general, though, economists are turning more cautious as the weeks go by. Many no longer think, as they once did, that economic activity will rebound this year on the rationale that most national economies were in good shape before the pandemic hit – especially in the U.S., where unemployment was near historic lows before the crisis. Instead, more are downgrading their projections, believing that staggered reopenings of economies until a vaccine is widely available imply a U- rather than a V-shape recovery. And while still projecting a sharp rise in economic activity in the second half of 2020, some Canadian economists believe Canada faces a particularly tough road ahead, especially compared to the U.S., for reasons that include higher household debt on average, greater dependence on oil and gas sector as a driver of growth, and lingering effects of the U.S.-China trade war on our economy.
But for the plastics and chemical sectors, the recovery may be as varied as was the falloff. In sectors that were hardest hit, like automotive, fears over potential shortages caused by future global healthcare crises might spur companies to start looking to other places, and many analysts predict a return to greater domestic manufacturing of parts and materials – and more diverse sourcing of parts and materials within a country. Most obviously, this would mean a move away from China sourcing. Foodservice is also being hit hard, and ripple effects are definitely hurting the manufacturers who serve those businesses, but the recovery might be quick. “We expect our business to bounce back very fast once the pandemic is over, as our customers will want to refill the pipeline, and more,” Abe Looy said.
For the chemical industry, which has been designated as essential in both Canada and the U.S., the short-term results may be challenging and the long-term results difficult to forecast. “The contraction in economic growth may reduce overall demand for chemical products in the near future, notwithstanding the increase in demand for essential products,” said Todd Karran. “Some long-lasting changes in consumer behaviours can be expected, but these will depend on factors that are challenging to predict today.”
There may also be silver linings that emerge, including some that will make the industry stronger in the long-term. When asked about positive impacts of the COVID-19 pandemic on their businesses, respondents to a survey conducted in Ontario in mid-April by Automate Canada and the Canadian Association of Moldmakers identified increased collaboration within their company, diversification of their markets, improved connection to government services, adoption of new technologies, and better workplace health and safety.
The plastics recycling sector might see longer term benefits as well. “The plastics recycling industry should gain positive momentum as companies refocus on addressing environmental and business management components such as decreasing CO2 emissions and removing ocean plastics; and adding more redundancies to help increase resilience in their supply chains,” officials at Baerlocher USA said.
The pandemic is still unfolding, and the surest prediction is that we can’t predict much. The desire for more supply chain transparency and better contingency planning are apparent even now, but there will surely be other changes no one is seeing yet. The end goal should be to create a more illness-proof industry as part of a larger illness-proof global economy. No one wants another April as cruel as this one.