Coronavirus Article

The ongoing coronavirus pandemic has caused tremendous disruption and uncertainty across the entire economic, financial, and social landscape. Below we highlight select industries with brief updates.

COVID-19: Industry Brief

Agriculture

Grains Updated May 13, 2020

  • Market Dynamics: Demand for agricultural food products is generally driven by demographics and consumer preference, with supply being driven by pricing outlooks and crop yield. COVID-19 may impact consumer preferences to a small extent, but demographic trends and crop yields should be well insulated from the impact of the disease.
  • COVID-19 Impacts: Consistent with all food producers, the agricultural industry is considered essential critical infrastructure. Nonetheless, COVID-19 is having short- to medium-term impacts on various markets for a variety of reasons. Labor shortages continue to be a concern in this sector and have been exacerbated by additional COVID-19 screening for guest-worker visa programs.
  • Specific-Sector Impacts
    • Cherries: There have been some supply chain impacts related to particular sectors such as West Coast cherries, which rely on export markets serviced by airfreight. This segment also has been impacted by a reduction in Asian demand for fruits and nuts for the first and second quarters of 2020.
    • Corn: Corn prices have dropped about 20 percent since the full impact of COVID-19 became apparent in Europe and North America. This decline was primarily due to concerns related to ethanol plant closures, which would remove approximately 220 to 300 million bushels of demand from the U.S. market, as well as weakening 2019 to 2020 U.S. export shipments, which are trending about 5 to 10 percent lower than 2018 to 2019 levels.
    • Wheat: Wheat prices were up in late March, as consumption of grain-related staples such as pasta, flour, bread, and crackers benefited from pandemic-related purchasing, in addition to expectations of a strong export market in 2020. Prices slipped slightly in April and early May as the global economy weakened and the foodservice deterioration demand element filtered into the marketplace.
    • Soybeans: Soybean prices are off on a year-to-date basis primarily due to weakness in the food service industry both in Asia and in the United States, which negatively affected consumption of soybean oil. In addition, soybean export shipments are lower on a year-to-date basis, which is also weighing on the market. Vegetable oil prices declined by approximately 5.2 percent in April 2020.
    • Beans: Canadian bean exports are down on a year-to-date basis primarily due to West Coast port congestion and limited container availability, which is driving pricing down.
    • Sugar: Sugar prices have softened due to stay-at-home and nonessential business orders in North America, Europe, and India roiling both supply and demand. Sugar prices have hit a 13-year low, declining 13.6 percent as of early May 2020 from March levels.
  • Valuation Outlook: From an inventory valuation perspective, while certain inventory positions may be impacted by short-term price fluctuations, on a mark-to-market basis recovery rates should hold up despite the impact of COVID-19.
COVID-19: Industry Brief Meter - Grain

Farming Equipment Updated  March 30, 2020

  • Market Dynamics: The market for agricultural farming equipment should continue to be stable, but supply chain concerns and business closures may have a short-term impact on the marketplace.
  • Federal Stimulus Impacts: Federal stimulus dollars as part of the recently passed Coronavirus Aid, Relief, and. Economic Security Act (CARES) should help farming operations, which are considered essential businesses The CARES Act is reported to include a $14 billion increase in the U.S. Department of Agriculture’s borrowing authority under the Commodity Credit Corporation, and $9.5 billion to assist specialty crop producers, direct retail farmers, and livestock operators. In addition, the reduction in prime rates should assist in making equipment financing more affordable.
  • Tariff Concerns: The Phase I trade agreement between China and the United States that went into effect in mid-February 2020 should increase exports of soybeans to China in the second half of 2020, which should have a positive impact on the industry.
  • COVID-19 Impacts: While there is little doubt that the COVID-19 pandemic will have an impact on the industry in the short term, to date rural America has been less impacted by the spread of COVID-19 as compared to large urban centers, and the nature of farming has fewer issues related to social distancing than other workplace activities, which should also lessen the impact of the virus.
  • Valuation Outlook: From an appraisal valuation perspective, Gordon Brothers would expect the farming equipment marketplace to be relatively unscathed by COVID-19.

Chemicals

Industrial Chemicals Updated August 26, 2020

  • Market Dynamics: Activity in the chemical industry is typically directly linked to industrial activity with pricing driven by a combination of finished product supply and demand as well as feedstock prices.
  • COVID-19 Impacts: The U.S. chemical industry was considered essential and allowed to operate as normal during the COVID-19 pandemic shutdown period, while following Centers for Disease Control and Prevention workforce and customer protection guidance. Precursor raw materials chemical transport by truck was also permitted.
  • Petrochemicals: With petrochemical feedstock pricing declining due to oil prices, many related chemical prices such as ethylene, naphtha, benzene, and propane also dropped significantly earlier this year, although they have since recovered. Pricing for other products have also been impacted by the pandemic, some negatively due to reduced industrial activity and others positively, such as isopropanol and cleaning-related solvents.
  • General Market Conditions: As of August 2020, demand for most types has improved due to the economic and industrial recovery especially in the construction and automotive sectors. The Institute for Supply Management, reported in their latest Purchasing Manager’s Survey released on September 1, 2020 the following about the Chemical industry. “Business is very good. Production cannot keep up with demand. Some upstream supply chains are starting to have issues with raw material and/or transportation availability.” Demand for certain chemicals remains for tight due to either high demand such as isopropyl alcohol or supply limitations due Hurricane Laura and or disruption earlier in the year due to COVID-19 related issues.
  • Valuation Outlook – Inventory: While it is clear that prices and demand for all types of chemicals are going to be volatile and subject to swings as the marketplace rebalances due to the combined impact of the COVID-19 pandemic as well as petroleum price volatility, Gordon Brothers believes that appraisal values for inventory on a mark-to-market basis should be relatively stable once the immediate marketplace impacts are resolved.

Inventory

COVID-19: Industry Brief Meter - Chemicals Inventory
 

Construction & Building Supplies

BUILDING MATERIALS & SUPPLIES Updated May 19, 2020

  • Pre COVID-19 Market Sentiment: Prior to the coronavirus pandemic hitting, revenue for the building products industry was forecasted to decline slightly in 2020 based primarily on an expectation of a softening housing market and North American economy. The industry had been growing over the five-year period ended December 2019 at an annual growth of 1.8 percent supported by a housing market that had been expanding steadily since the recovery from the Great Recession began in 2009. The first quarter 2020 results prior to the pandemic were stronger than expected and the housing market and demand for building materials was robust in February 2020.
  • COVID Impacts: In all regions, building product distributors were deemed essential businesses allowing these businesses to remain open if they chose. Home center volumes of lumber products were reported to be a bright spot in the lumber business in March and early April, with companies noting that people were making use of their time away from work to complete home projects. Some distributors said they continued to ship steadily to job sites where builders were trying to finish projects. However, some projects were interrupted by changing regulations, as city, state, and federal officials reacted to the virus threat.
  • Housing Market Impacts: COVID-19 has reduced residential and commercial construction activity. In most jurisdictions, existing construction was allowed to proceed, but the initiation of new projects has been limited in some regions, and the impact of complying with social distancing rules as well as the availability of inspectors and supplies has limited activity. The residential building permit rate for April 2020 fell to 20.8 percent below the March 2020 rate, 25.3 percent below the February 2020 rate, and 19.2 percent below the April 2019 rate. Privately owned housing starts fell by 30.2 percent in April 2020 following an 18.6 percent decline in March 2020 and were 29.7 percent below the April 2019 rate. On April 23, 2020, JP Morgan Chase predicted a 51.3 percent drop in housing starts by summer from pre-pandemic levels, with a quick recovery to follow.
  • Interest Rates: The interest rate adjustments made by the Federal Reserve Board in early March 2020 have had a positive impact on the housing market. The average 30-year fixed-rate mortgage dropped from 3.72 percent as reported by the Federal Home Loan Mortgage Corporation, known as Freddie Mac, for the week of January 2, 2020, to 3.28 percent for the week ended May 14, 2020. This should have a positive impact on housing longer term, but availability of credit both in the primary mortgage market and the secondary home equity market has been curtailed due to the pandemic. Total residential real estate loan volume has fallen since early April by about 1.0 percent likely reflecting the impact of weakened consumer confidence since the beginning of the year, job losses, and lower loan demand due to falling rates of housing starts and new building permit applications.
  • Lumber Sales Reports: Despite the restrictions, sales of lumber in April were strong throughout the United States. Random Lengths, a trade journal that tracks lumber and other building products market conditions, reported in its May 8, 2020, newsletter that “dealers in all regions across the U.S. raised their sales expectations for lumber and panels,” which still trailed year-ago levels by about 12.7 percent…Jumps in sales expectations for May were most notable in the Midwest, South Atlantic, and Northeast regions.” Treated lumber demand, particularly from home centers, was “unrelenting” according to the Random Lengths report.
  • Roofing Segment: Roofing results have been weak on a year-over-year basis, due primarily to benign weather patterns in 2019. The first quarter of 2019 had heavy roofing sales due to an active hurricane season in 2018. One large manufacturer in the space reported that the first quarter 2020 sales were down approximately 15 percent from 2019, which were up 20 percent over 2018; sales were reported as especially weak in the second half of March. Beacon Roofing Supply, a large distributor in the space reported weakness in roofing sales as well, but reported only a 1.3 percent decline for the first quarter compared to the prior-year period. Both companies expected weakness in April and May due to COVID-19 impacts.
  • Tile Segment: A large tile retailer reported a strong first quarter, with sales up 8.5 percent year over year, but was seeing a drop off in sales and foot traffic by 50 percent in April 2020.
  • First Quarter 2020 results: First quarter results from Huttig Building Products were positive for the first quarter of 2020, due to a strong housing market and economy. Nevertheless, the company expects conditions to be weak in the second quarter, and on May 4, 2020, announced it had proactively taken the following steps in anticipation of the pandemic impact: “…communicating with vendors and customers, seeking modification of payment and other terms of rental and procurement agreements and monitoring our accounts receivable. We have also reduced inventory levels to meet an anticipated decrease in demand and have implemented cost containment measures, including lay-offs, wage reductions, suspension of matching contributions to our qualified defined contribution plan, and eliminated non-essential spend. We have also delayed or cancelled certain planned capital expenditures.” Boise Cascade also published its first quarter results on May 7, 2020, reporting a sales increase for the first quarter of 12.3 percent, driven by a sales volume increase of 17 percent, offset by lower prices. Despite the positive results, the company curtailed or reduced operating schedules at essentially all of its manufacturing facilities and reduced activity levels at all distribution facilities due to COVID-19 related impacts.
  • Valuation Outlook: From an outlook perspective, the building products industry is driven by commercial and residential construction activity. How the housing market reacts to the COVID-19 pandemic is uncertain; the building products distribution market will likely be directly impacted by whatever the outcome is in this sector. The interest rate adjustment made in early March 2020 is likely having and will have a positive impact on the housing market. From an inventory appraisal perspective, other than temporary impacts and commodity pricing issues due to the typical turnover profile of businesses in this sector, Gordon Brothers would not expect to see large declines in valuations. Special orders may be impacted if construction and/or housing projects are delayed.
COVID-19: Industry Brief Meter - Building Products Inventory

Concrete Batch Plants Updated September 2, 2020

  • Market Dynamics: The primary external factor affecting concrete batch plants and equipment is commercial construction and highway spending, with steel prices also having a material impact. Additionally, the near-zero Federal funds rate since March has helped incentivize investment in the industry.
  • COVID-19 Impacts: As of late March, construction was considered an essential service in roughly 45 of 50 states, but labor, travel, and supply issues slowed activity in the sector during the shutdown period. Since regions began reopening in May, construction activity has rebounded. Monthly U.S. homebuilding rates increased for the third straight month in July with 1.495 million new starts, representing an increase of 17.5 percent over June. July starts increased 22.6 percent over June after falling 26.4 percent to a five-year low in April. Although starts for July remained approximately 7.5 percent below the January peak of 1.6 million, the positive trend bodes well for the industry, at least in the near term. Another positive trend was in the number of building permits for residential construction issued, which produced 3.5 percent and 18.8 percent month-over-month increases for June and July, respectively. However, highway and street production dropped in spending by 1.7 and 2.7 percent for June and July, respectively, as a result of shelter-in-place orders, local outbreaks and decreased public funding. Similarly, educational construction spending, one of the largest public segments, declined in June, albeit at a lower rate of 0.6 percent. Private non-residential construction spending increased slightly by 0.2 percent for June over May. Numbers were also positive for power, manufacturing and office construction, which increased by 0.7, 1.7 and 0.3 percent, respectively.
  • Legislation Status: Growth for the industry is partially dependent upon passage of the “Moving Forward Act,” which is a $1.5 trillion infrastructure and stimulus bill. After House passage on July 1, the bill moved to the Senate where it faces an uncertain future. The Executive Office of the President’s Office of Management and Budget issued a Statement of Administration Policy on June 29 asserting that the Trump Administration opposes passage of the bill because it “is heavily biased against rural America,” “appears to be entirely debt-financed,” and “fails to tackle the issue of unnecessary permitting delays, which are one of the most significant impediments to improving our infrastructure.” If passed, it would likely have a positive impact on public construction spending related to roads and bridges, schools, housing and other public transportation projects.
  • Valuation Outlook: From a valuation perspective, the impact on batch plants and related equipment will depend on how the construction marketplace weathers the current crisis in the medium to long term. In the short term, the market remains somewhat uncertain. However, construction fundamentals and demand for batch plants will likely be stable in the aftermath of the crisis, as there is an expectation that there will be a quick snapback in this industry in all regions except the oil patch once the COVID-19 pandemic passes.
Industry Brief Projected Values – Concrete Batch Plants and Equipment

Mobile Cranes Updated August 26, 2020

  • Market Dynamics: The primary external factor affecting the mobile crane market is construction—both residential and private non-residential, with steel prices and the state of several key industries such as oil and gas markets also having a material impact. 
  • COVID-19 Impacts: Beginning in March 2020, the response to the COVID-19 pandemic included widespread lockdown mandates and travel restrictions. As a result, the primary external factor affecting the mobile crane market – construction (both residential and private nonresidential) – experienced an abrupt and significant decrease in activity as many projects were paused, postponed, or canceled. Industry projections updated as of May 2020 for construction output anticipate a 6.6 percent drop for 2020, as compared to the slight (0.6 percent) rise that was expected prior to the COVID-19 pandemic, according to information published by American Cranes and Transport.
  • Stimulus Bill Status: Growth for the industry is partially dependent upon passage of the “Moving Forward Act,” which is a $1.5 trillion infrastructure and stimulus bill. After House passage on July 1, the bill moved to the Senate where it faces an uncertain future. The Executive Office of the President’s Office of Management and Budget issued a Statement of Administration Policy on June 29 asserting that the Trump Administration opposes passage of the bill because it “is heavily biased against rural America,” “appears to be entirely debt-financed,” and “fails to tackle the issue of unnecessary permitting delays, which are one of the most significant impediments to improving our infrastructure.” If passed, it would likely have a positive impact on public construction spending related to roads and bridges, schools, housing, and other public transportation projects.
  • Valuation Outlook: From a valuation perspective, the impact on mobile crane values will depend on how the construction marketplace weathers the ongoing pandemic in the medium to long term. In states that have experienced a second wave of shutdowns due to rising infection rates, the market will likely remain depressed or simply impacted by the logistics of trying to liquidate a crane while travel is limited. However, construction fundamentals and demand for mobile cranes will likely be stable in the aftermath of the crisis, as there is an expectation that there will be a snapback in this industry in all regions except the oil patch once the COVID-19 pandemic passes.
Industry Brief Meter - Mobile Cranes

 

Energy

Coal Updated March 30, 2020

  • Market Dynamics: The value of coal is linked directly with natural gas prices for thermal coal and to both steel production levels and prices for metallurgical coal.  Both of these sectors have been impacted by COVID-19.  
  • Natural Gas Prices: On a year-to-date basis, natural gas prices have declined by approximately 27 percent, making natural gas cheaper, thus weighing down thermal coal prices.  
  • Coal Prices: Thermal coal prices have been reasonably steady for 2020 but are about 10 percent off from mid-January 2020 highs.  
  • Production Cuts: As of late March 2020, three coal-mining companies in the U.S. had announced suspension of operations in the country to contain the spread of coronavirus.  Electricity demand will be off in the second quarter of 2020, weighing on the power generation sector.  
  • Metallurgical Market Sentiment: With steel prices dropping and U.S. capacity utilization dropping by 3 to 4 percent year-to-date through March, it is likely that demand for metallurgical coal will weaken as well.  Gordon Brothers expects a drop off in demand for coal, and that pressure will impact already the weakened coal sector.  
  • Valuation Outlook: On a mark-to-market basis, coal inventory valuations will be stable.  Equipment values, though already low on a historic basis, will likely weaken further as there will likely be additional liquidation activity in the sector, especially if natural gas remain at current price levels.

Inventory

COVID-19: Industry Brief Meter - Coal
 


Machinery & Equipment

COVID-19: Industry Brief Meter - Coal - M&E

Ethanol Updated March 30, 2020

  • Market Sentiment: The U.S. ethanol industry, which was facing challenges before COVID-19, has been reeling since the outbreak of the coronavirus and the total destruction of gasoline demand that followed as California and other states adopted shelter-in-place orders. 
  • Production Cuts: Despite being classified as an essential industry, several dozen facilities have idled production since March 2020. It is estimated that two to three billion gallons of ethanol production have already come off line with more to follow.  Many of the producers that are still operating are expected to idle production once their feedstock inventories are exhausted. 
  • Stimulus Impacts: While smaller producers are expected to receive aid under the U.S. government stimulus package, larger producers may not.  Consequently, the industry is looking to the next round of stimulus for more focused aid for the sector.  Even with the stimulus aid, the consensus is that a large number of ethanol producers will need grants to stay in business over the long run. 
  • Valuation Outlook: Inventory appraisal values for ethanol will be impacted from a pricing perspective but should remain stable on a market-to-market basis.  Equipment assets will be materially impaired at current fuel price levels.

Inventory

COVID-19: Industry Brief Meter - Ethanol
 


Machinery & Equipment

COVID-19: Industry Brief Meter - Ethanol - Machinery & Equipment

FRAC SAND Updated June 18, 2020

  • Oil Market Conditions: West Texas Intermediate (WTI) crude oil prices infamously went below zero briefly in April 2020 in advance of the May WTI futures expiration due to regional storage issues. Prices recovered to the low teens within days of going negative on April 20, and then rose to over $30 per barrel by mid-May, closing at $37.16 per barrel on June 8, 2020. The market dynamic responsible for the pricing volatility was reduced petroleum-related consumption in April and May due to COVID-19, which caused a storage capacity crisis to occur with crude oil- and distillate-related storage filling up around the world. According to the Energy Information Administration (EIA), global oil inventories at the end of May were 1.4 billion barrels higher than they were at the end of 2019. Despite the rise in crude oil, production declines around the world have occurred rapidly, and demand has been increasing as multiple countries unwind their business closures and stay-at-home orders. Although storage conditions remain at capacity, on June 10, 2020, the EIA raised its 2020 oil price forecasts to average $35.14 per barrel in 2020 and $43.88 per barrel in 2021. These estimates were higher than its May forecast for the balance of 2020, which had been $30.10 per barrel for 2020 and $43.31 per barrel in 2021. Despite this relatively positive news, drilling activity has continued to decline. As of the week of June 5, 2020, the average number of active U.S. drilling rigs dropped to 287, which was down from 975 in the same period in 2019 and represented the thirteenth straight weekly decline.
  • Capital Investment in the Sector: Capital spending among Exploration and Production companies for 2020 was cut back by 35% to 45% in March and April, as companies recalibrated their capital investment plans for COVID-19. Frac Sand companies have been hammered by the low-price environment and the decline in drilling. Energy research firm Rystad Energy, based in Norway, projects that if an oil price of $30 to $40 a barrel is sustained, sand producers in Wisconsin and even those in Texas, near the busiest U.S. oilfields, will struggle to make a profit. Assuming no further shifts in market inputs, this level of pricing will materially reduce new drilling activity and delay completion on many already drilled wells.
  • Bankruptcy Activity: Emerge Energy filed for bankruptcy protection in July 2019 and has emerged from bankruptcy in 2020 having been purchased out of bankruptcy by HPS Investment Partners through a Chapter 7 process. Emerge owns five sand mines in the Wisconsin basin. Vista Proppants and Logistics, LLC, an in-basin provider of frac sand solutions for oil and gas well completions in the Permian Basin, filed for Chapter 11 bankruptcy protection on June 11, 2020, and expects to emerge from the Chapter 11 reorganization process within approximately 120 days. In addition, to these frac sand-specific cases, a significant number of companies have filed for bankruptcy protection in the drilling space.
  • Market Prices: As of February 2020, frac sand prices had dropped approximately 50 percent from 2018 levels, indicating that the industry was already weak prior to the COVID-10 crisis. Discussions with market participants in March indicated a pullback of 20 percent on volumes, with discussion of further adjustment to contract pricing for the balance of 2020 not yet raised.
  • Market Sentiment: The outlook for this industry was dim prior to COVID-19, and while Gordon Brothers would expect there to still be a market for frac sand in the future, under current conditions the expectation is for there to be considerable consolidation and contraction in the industry.
  • Inventory Valuation: Gordon Brothers expects that only dry sand on firm orders with recently confirmed pricing and near-term delivery would have value in a liquidation. Equipment values will be negatively impacted and will depend on the equipment-, site-, and logistics-specific considerations as to what the values will be in this new environment. 
COVID-19: Industry Brief Meter - Frac Sand

Lubricants Updated March 30, 2020

  • Market Sentiment: Although the industry has been deemed essential, lubricants will be impacted in the short term by coronavirus supply chain interruptions and increased competition from Asian suppliers.  In addition, consumption of industrial lubricants in the aviation and oil and gas sectors will likely be negative, but should be stable in the medium to longer term.  
  • Oil Price Impact: The precipitous fall of crude oil prices since early March 2020 and the coronavirus impact on the world economy prompted hefty base oil price decreases over the week of March 25, 2020.  
  • Market Demand Outlook: The market will likely contract over the course of 2020 and 2021 due to an anticipated general shrink in the size of North American industrial demand and long-term price reductions.  
  • Valuation Outlook: Gordon Brothers would expect there to be short-term impacts to inventory values due to the drop in pricing and pressure on gross margins following a drop in demand.  We would not expect a long-term impact to market sentiment. Machinery and equipment values may see a nominal negative impacted especially if there is a longer-term adjustment to market size due to overall economic contraction.
COVID-19: Industry Brief Meter - Lubricants

OIL & GAS – DOWNHOLE TOOLS AND E&P EQUIPMENT AND INVENTORY Updated June 18, 2020

  • Oil Market Conditions: West Texas Intermediate (WTI) crude oil prices infamously went below zero briefly in April 2020 in advance of the May WTI futures expiration due to regional storage issues. Prices recovered to the low teens within days of going negative on April 20, and then rose to over $30 per barrel by mid-May, closing at $37.16 per barrel on June 8, 2020. The market dynamic responsible for the pricing volatility was reduced petroleum-related consumption in April and May due to COVID-19, which caused a storage capacity crisis to occur with crude oil- and distillate-related storage filling up around the world. According to the Energy Information Administration (EIA), global oil inventories at the end of May were 1.4 billion barrels higher than they were at the end of 2019. Despite the rise in crude oil, production declines around the world have occurred rapidly, and demand has been increasing as multiple countries unwind their business closures and stay-at-home orders. Although storage conditions remain at capacity, on June 10, 2020, the EIA raised its 2020 oil price forecasts to average $35.14 per barrel in 2020 and $43.88 per barrel in 2021. These estimates were higher than its May forecast for the balance of 2020, which had been $30.10 per barrel for 2020 and $43.31 per barrel in 2021. Despite this relatively positive news, drilling activity has continued to decline. As of the week of June 5, 2020, the average number of active U.S. drilling rigs dropped to 287, which was down from 975 in the same period in 2019 and represented the 13th straight weekly decline.
  • Oil Market Capital Expenditure Falling: As of the week of March 28, 2020, the North American oil majors had slashed 2020 exploration and production (E&P) budgets by 30 percent to 40 percent (on average). Year-to-date active rig counts were down 28 percent through the end of March and are expected to continue dropping.
  • Market Sentiment: Values for downhole tools and assets related to oil field E&P will be near depression levels until there is broad-based economic recovery and clear indications that a resurgence in COVID-19 infections will not threaten the economy. The latest price and production downturn, although materially affected by the coronavirus, is forecast to recover slowly throughout the balance of 2020 due to the lingering impacts on the economy from the April and May contraction and the potential for a resurgence in an OPEC versus Russia price war if production levels begin to recover in a meaningful way. The current level of production, although reduced worldwide in various regions, is currently higher than demand.
  • Industry Fallout: Several large operators in the space (Transocean, Nabors Industries, and Superior Energy Services) collectively have $7.0 billion of debt set to mature over the next two years. Extraction Oil & Gas filed for bankruptcy protection on June 14, 2020, becoming one of the biggest oil patch bankruptcies so far in 2020. The company recorded a $1.4 billion net loss in 2019, and production volumes, which were above 100,000 barrels per day in late 2019, had dropped to 90,000 barrels per day by the time of its filing. As of June 8, 2020, Chesapeake Energy was reported to be preparing a potential Chapter 11 bankruptcy filing. Chesapeake was one of the first energy companies to aggressively combine breakthroughs in horizontal drilling and high-intensity hydraulic fracturing to shale rock long ignored by geologists looking for gas or oil. The Company reportedly owes $9 billion to its creditors, and it recorded an $8.5 billion impairment for the first three months of 2020 as the value of its fields, a sand mine, and other assets plunged along with commodity prices. Weatherford International is a large oil field services company that filed for chapter 11 bankruptcy protection in July 2019 and emerged from bankruptcy in December 2019. It was reported on June 8, 2020, that the Company had retained bankruptcy counsel, possibly in preparation of a new filing, or to assist in negotiating the restructuring of the company’s debt. California Resources, a California-based E&P company that was a spinoff from Occidental Petroleum in 2014, was also reported to be potentially filing for Chapter 11 bankruptcy protection, in mid-June.  According to corporate law firm Haynes and Boone, LLP, 18 companies filed for Chapter 11 protection between January and May 2020. Energy research firm Rystad Energy, based in Norway, estimates that as many as 73 shale drillers could be forced into bankruptcy by the end of 2020.
  • Liquidation Market Happenings: Gordon Brothers has recently seen activity in this space and proposed an orderly liquidation of an oil and gas servicing company, Tri-Point Oil and Gas Production Systems.
  • Valuation Outlook: Gordon Brothers expects that secondary market demand for anything other than ongoing well-servicing equipment, such as lift equipment or other niche sectors, will be severely depressed for as long as this price environment lasts.
COVID-19: Industry Brief Meter - Oil & Gas - Downhole Tools

Oil & Gas – Mid and Upstream Updated March 30, 2020

  • Oil & Gas Market Conditions: West Texas Intermediate crude oil at $22 to $24/barrel and at single digits in Alberta, Canada (Western Canadian Select at $4.18/barrel on March 30, 2020), makes almost every oil play unprofitable in North America with the exception of a minimal number conventional plays.  Assuming no governmental intervention, this will materially reduce new drilling activity to near zero within three to six months, potentially reduce existing production in western Canada, and delay completion on many already drilled wells. 
  • Market Sentiment: Midstream activity in the near- to mid-term will likely be stable, given that oil and natural gas wells will still flow for several years. However, fall-off is expected over the next few years, assuming that the current pricing environment does not move.  
  • Market Drivers: It is likely that pipeline construction activity will be somewhat insulated due to the backlog of pipeline projects currently underway.  Compression-related assets will likely be impacted less than production assets and the low price of natural gas will likely support further demand in this space from electrical power generators. 
  • Valuation Outlook: From an appraised value perspective, most of the assets Gordon Brothers sees in this space are machinery and equipment.  We would expect that secondary market demand will be weak, and the medium-term outlook will be weaker in the COVID-19/Saudi-Russo price war environment due to an anticipated future reduction in natural gas production volume.
COVID-19: Industry Brief Meter - Oil and Gas - Mid and Upstream

OIL & GAS – OCTG Updated June 18, 2020

  • Oil Market Conditions: West Texas Intermediate (WTI) crude oil prices infamously went below zero briefly in April 2020 in advance of the May WTI futures expiration due to regional storage issues. Prices recovered to the low teens within days of going negative on April 20, and then rose to over $30 per barrel by mid-May, closing at $37.16 per barrel on June 8, 2020. The market dynamic responsible for the pricing volatility was reduced petroleum-related consumption in April and May due to COVID-19, which caused a storage capacity crisis to occur with crude oil- and distillate-related storage filling up around the world. According to the Energy Information Administration (EIA), global oil inventories at the end of May were 1.4 billion barrels higher than they were at the end of 2019. Despite the rise in crude oil, production declines around the world have occurred rapidly, and demand has been increasing as multiple countries unwind their business closures and stay-at-home orders. Although storage conditions remain at capacity, on June 10, 2020, the EIA raised its 2020 oil price forecasts to average $35.14 per barrel in 2020 and $43.88 per barrel in 2021. These estimates were higher than its May forecast for the balance of 2020, which had been $30.10 per barrel for 2020 and $43.31 per barrel in 2021. Despite this relatively positive news, drilling activity has continued to decline. As of the week of June 5, 2020, the average number of active U.S. drilling rigs dropped to 287, which was down from 975 in the same period in 2019 and represented the 13th straight weekly decline.
  • Oil Market Capital Expenditure Falling: Through April 2020, the North American oil majors had slashed 2020 Exploration and Production (E&P) budgets by an average of 30 to 40 percent from 2019 levels.
  • Oil Country Tubular Goods (OCTG) Production Closures: U.S. Steel idled tubular operations indefinitely at its facilities in Lone Star, Texas, and Lorain, Ohio on March 24, 2020. Tenaris S.A. similarly announced a suspension of operations at two plants in Koppel and Ambridge, Pennsylvania, affecting 560 workers. Texas Steel Conversion, an oil country tubular goods (OCTG) processor and drill pipe manufacturer sent Worker Adjustment and Retraining Notification (WARN) Act notices to all 491 employees who work at five facilities throughout Texas on May 29, 2020. These facilities were producing various products but had a heavy focus on OCTG. The WARN Act requires that employers provide at least 60 calendar days of advance notice of any mass layoffs or plant closings.
  • Tariffs: A favorable ruling was released by the Department of Commerce on April 9, 2020, regarding an affirmative final determination in the antidumping duty investigation on imports of oil country tubular goods from China. This resulted in a final dumping rate of 29.86 percent to 99.14 percent for multiple Chinese OCTG importers.
  • OCTG Pricing Trends: The U.S. OCTG market flattened in June 2020 after two consecutive monthly drops indicating that the recent supply cuts were at least partially offsetting the demand loss. The monthly S&P Global Platts domestic OCTG assessment remained flat as of June 1 with import prices dropping by 1.4 percent. PipeLogix reported a decline for the month of May 2020 of 4.9 percent based on its index of 62 individual OCTG products. Despite recent increases in oil prices, sustainability of the pricing uptrend is still being questioned by U.S. oil producers, reducing market sentiment.
  • Market Sentiment: Distributors’ sentiment (as measured by PipeLogix) in the OCTG space turned sharply lower in March 2020 to 24, signaling a significant market contraction; it has hovered at these low levels through May, hitting 22 in April and rising slightly higher to 25 in May. New orders were practically non-existent for all distributors, and the price outlook score was very weak, with unsold inventory levels growing. Seventeen straight months of declining prices, tariffs, and depression-level impacts on demand are having a crushing impact on this sector.
  • Bankruptcies: Extraction Oil & Gas filed for bankruptcy protection on June 14, 2020, becoming one of the biggest oilpatch bankruptcies so far in 2020. The company recorded a $1.4 billion net loss in 2019, and production volumes, which were above 100,000 barrels per day in late 2019, had dropped to 90,000 barrels per day by the time of its filing. As of June 8, 2020, Chesapeake Energy was reported to be preparing a potential Chapter 11 bankruptcy filing. Chesapeake was one of the first energy companies to aggressively combine breakthroughs in horizontal drilling and high-intensity hydraulic fracturing to shale rock long ignored by geologists looking for gas or oil. The Company reportedly owes $9 billion to its creditors, and it recorded an $8.5 billion impairment for the first three months of 2020, as the value of its fields, a sand mine, and other assets plunged along with commodity prices. Weatherford International is a large oil field services company that filed for chapter 11 bankruptcy protection in July 2019 and emerged from bankruptcy in December 2019. It was reported on June 8, 2020, that the Company retained bankruptcy counsel, possibly in preparation of a new filing or to assist in negotiating the restructuring of the company’s debt. California Resources, a California-based exploration and production company that was a spinoff from Occidental Petroleum in 2014, was also reported to be potentially filing for Chapter 11 bankruptcy protection in mid-June. According to corporate law firm Haynes and Boone, LLP, 18 companies filed for Chapter 11 protection between January and May 2020. In addition, Rystad Energy, an energy research firm based out of Norway, estimates that as many as 73 shale drillers could be forced into bankruptcy by the end of 2020.
  • Market Outlook: Values for downhole tools and assets related to oil field exploration and production will be near depression levels until there is broad-based economic recovery and clear indications that a resurgence in COVID-19 infections will not threaten the economy. The latest price and production downturn, although materially affected by the coronavirus, is forecast to recover slowly throughout the balance of 2020 due to the lingering impacts on the economy from the April and May contraction and the potential for a resurgence in an OPEC versus Russia price war if production levels begin to recover in a meaningful way. The current level of production, although reduced worldwide in various regions, is currently higher than demand.
  • Valuation Outlook: Concerning appraisal values from an inventory perspective, Gordon Brothers expects a material drop in tier I volumes. Tier II is expected to be limited to low volumes due to market conditions and a weak structural market. Scrap is expected to be negatively impacted based on market weakness. Equipment values in this space will be similarly impacted.

 

COVID-19: Industry Brief Meter - Oil and Gas OCTG

Food & Beverage

Beef, Pork & Poultry Updated June 15, 2020

  • COVID-19 Impacts: Protein producers are seeing relatively stable demand as the pandemic evolves with grocery store demand being positively impacted. However, food service shipments have been materially negatively impacted, and expectations are that the impact will extend through the medium and long term as the restaurant sector shrinks.
  • Impacts on Food Service: The U.S. Census Bureau Advance Retail Sales report issued on May 15, 2020, showed a 23.6 percent drop in food service and beverage retail sales for the month of April 2020 compared to pre-pandemic levels. From mid-April to mid-June, restaurants in most states had reopened in some form. Even some of the hardest hit states, such as New York and New Jersey have begun to reopen this sector. Restaurant visits hit a low point as of the week of April 12, 2020, being off over 40% from pre-pandemic levels, according to research firm NPD Group. By the week of May 24, 2020, rates had recovered over 50 percent of that decline and were back to within 18.8 percent of normal levels according to available foot traffic metrics. Almost all restaurant openings in the United States have been allowed with varying levels of social distancing protocols in place, including masks, occupancy limits, and other requirements. It is estimated that there will be an occupancy reduction of 25 to 50 percent due to social distancing requirements for on-premise dining going forward Overall, consumers remain cautious in relation to eating out. By some estimates, 30 percent of restaurants in the United States are projected go out of business because of the pandemic.
  • Labor and Production Impacts: Labor disruptions have been heavily affecting the sector due to COVID-19 outbreaks among food processing workers, as well as issues admitting guest workers into the United States. Multiple reports of COVID-19 infections in food processing plants that arose in March accelerated in April and continued into May. The latest reporting indicates that 73 plants in the United States and Canada have been closed, forced to slow production, or have reported COVID-19 infections onsite.
  • Slaughterhouse Volumes and Prices: Beef, pork, and poultry prices rose sharply in April and May on production constraints due to COVID-19-related processing plant outages. While some of these price increases were volatile, pricing levels have retreated as production levels have reached more normal levels. For the week ending June 8, 2020, cattle cutout values for choice steers were 7.1 percent over the 2019 level, and pork carcass prices had declined by 12.9 percent despite being significantly higher in April and May. While slaughter levels for cattle dropped by over 35 percent in May, rates had recovered fully by the week of June 8, 2020, with slaughter levels up 1.7 percent over the same period in 2019. Hog slaughter levels were similarly impacted in April and May (down over 30 percent from pre-pandemic levels) but had recovered to within 0.7 percent of the 2019 level by the same date. While the export outlook for 2020 had been positive, first-quarter export levels were below expectations due to the impact of the coronavirus on Chinese markets; exports in the second quarter have been strong, but there is uncertainty in the marketplace on how much export demand there will be in China due to trade tensions.
  • Other Impacts: The shortage in various meat and poultry products that was evident in grocery stores in April and May has provided an opening for the plant-based meat alternative segment to exploit. According to Dow Jones Factiva, “Beyond Meat Inc., Impossible Foods Inc. and Tofurky Co. say they are ramping up production, discounting their plant-based meat alternatives to appeal to more consumers, and expanding into more stores—sometimes at the request of grocery chains that had been running short of staple meat products.”
  • Valuation Outlook: From a valuation perspective, on a mark-to-market basis, Gordon Brothers would not expect a material impact on values given the stable overall demand in the sector. Food service products, especially private-label products to that sector will likely be impaired.

COVID-19: Industry Brief Meter - Beef, Pork and Poultry


Protein Plant Closures Table

click to enlarge

Protein Plant Closures Table

Dairy Updated May 13, 2020

  • COVID-19 Market Impacts: Consistent with all food producers, the dairy industry has been considered essential critical infrastructure since the onset of the pandemic. Despite this, dairy farmers are facing a collapse in milk prices due to reduced institutional and food service demand. The U.S. Department of Agriculture’s April 2020 dairy outlook, the first forecast to incorporate market impacts of the COVID-19 pandemic, projects a much lower 2020 average milk price than it had just a month earlier. The April estimate is $14.35 per hundredweight, which is almost $4.00 below its March estimate of $18.25 per hundredweight. While many food companies have seen significant demand for their products, agriculture executives note that the surge may not represent a fundamental shift in consumers’ overall food purchasing, but rather an increase in consumption at home due to forced restaurant closures.
  • Weakness in the Milk Sector: The dairy industry, and in particular the milk sector, has been under pressure in the last few years due to declining per-capita milk consumption, and the pandemic has not changed the direction of that trend. Milk production increased in the period from December 2019 to February 2020 by 2.4 percent compared to the prior year. Initial commercial consumption of milk fats and skim in the months of January and February 2020, prior to the pandemic’s impact on the U.S. marketplace, were off due to continuing consumer preferences for alternative milks and weaker dairy milk consumption nationally. The pandemic has exacerbated this trend primarily due to the closure of schools, as well as restaurant closures, which has reduced demand for milk-based products including ice cream, coffee additives, and others.
  • Pricing Weakness: Despite strong grocery sales, milk prices have dropped to unprofitable levels with dairy farmers concerns about processing plants closing or cutting production forcing them to dump milk. As a result, cheese prices, which are linked to milk prices, have dropped just under $0.60 per pound, from $1.76 per pound as of March 2, 2020, to $1.17 per pound as of May 2, 2020, for Grade-A cheese block. Butter prices have similarly dropped from $1.86 to $1.12 per pound for AA butter.
  • Exports Trends: U.S. dairy exports during March 2020 were valued at $582.2 million, a 10 percent increase from the prior year and the highest monthly value for dairy exports since August 2014, according the U.S. Department of Agriculture’s Foreign Agricultural Service. The biggest increases came from Canada (+1 percent) and Mexico (+11 percent), with exports to China down 2 percent.
  • Dean Foods: Despite the volatility in the marketplace, the ongoing Dean Foods bankruptcy auction sale was completed on March 31, 2020, with the sale of a large portion of its plants to Dairy Farmers of America and two other buyers. An anti-trust investigation of the transaction by the U.S. Department of Justice concluded in early May 2020 resulted in a settlement requiring some divestitures of certain plants.
  • Stimulus Actions: On May 11, 2020, the U.S. Secretary of Agriculture announced a plan for $470 million in Section 32 food purchases to occur in the third quarter of fiscal year 2020, in addition to purchases previously announced. Of this total spend, the agency plans to buy $120 million in dairy products. Purchases are determined by industry requests, market analysis, and food bank needs. Similarly, on May 12, 2020, Canadian Prime Minister Justin Trudeau announced several measures and an investment of more than $252 million to support farmers, food businesses, and food processors in Canada.
  • Valuation Outlook: From an inventory perspective, in the short term for processors of dairy products, lower prices will make raw milk cheaper and should allow some opportunity for additional gross margin to be captured in value-added products. In the longer term, lower prices will reduce overall gross margin dollars and put pressure on the industry. For cheese processors, the market drop may impact any existing on-hand inventory. On a mark-to-market basis, Gordon Brothers would expect inventory values to hold firm. From an equipment perspective, lower milk prices will negatively impact dairy equipment especially milking-related equipment. The market was already soft due to ongoing challenges in the dairy market throughout 2019 and into early 2020, and Gordon Brothers’ outlook has not improved with the onset of the pandemic.

Inventory

COVID-19: Industry Brief Meter - Dairy Inventory
 


Machinery & Equipment

COVID-19: Industry Brief Meter - Dairy Machinery & Equipment

Seafood Updated June 15, 2020

  • COVID-19 Impacts: Portions of the seafood industry have been somewhat insulated from the impact of the pandemic, as food consumption has continued despite the impact of COVID-19 on everyday life. While the retail grocery side of the business has benefited, the food service segment, which currently accounts for 60 percent of seafood volumes, has been decimated. Gordon Brothers has seen short-term pricing and demand volatility especially in the fresh market, where a majority of the products sold ultimately go to restaurants. The food service sector has seen a significant decline in sales, which is consistent with all food service segments catering to restaurants, and the sector is now seeing production-related issues due to COVID-19-driven production facility closures as well as the impact of social distancing on businesses. Although retail sales to grocery stores and other retail outlets have been positively impacted due to a large spike in grocery store demand, how the sector performs in the long term will depend on how many restaurants go out of business due to the pandemic and what level of sales demand there will be at the remaining establishments.
  • Pricing Impacts: Fresh inventory segments have been the most vulnerable to fallout from the pandemic. Pricing on products such as lobsters, which rely heavily on restaurant sales as well as export demand, has seen the biggest impact. Lobster shipments to China ceased from late January through mid-April due to a lack of airfreight but had begun to resume as of the week of April 20, 2020. With the lack of an Asian export market and with reduced demand in the domestic restaurant sector, lobster prices had fallen about 30 percent from pre-pandemic levels through mid-April 2020 and then recovered about 10% of this decline in May, before declining again in early June due to normal seasonal harvest patterns. Farmed white frozen shrimp prices in the United States declined steadily from January through May, due at first to weakness in China, then to increasing levels of South American shrimp being re-directed to U.S. markets in the first quarter, followed by demand erosion as shrimp consumption in the United States was impacted by COVID-19 beginning in late March and continuing through May. Prices by the end of May 2020 were about 5 percent below 2019 levels but were 10 percent below January 2020 levels. Shrimp pricing ticked up in late May and into early June as demand from the food service sector began to recover. Salmon prices saw a somewhat similar trend with weakness in the first quarter, and then bottoming in April and early May. Some varieties (Norwegian for example) recovered in the second half of May and into June. Chilean fillet prices have remained weak, dropping over 40 percent from the beginning of the year and remaining at historically low levels through the end of May. The recent COVID-19 resurgence in Beijing and concerns about salmon being related to these outbreaks may have a negative impact on pricing in the short term. However, not all prices have dropped, as pricing for tilapia, which is typically sold in the frozen section at grocery stores, has held firm.
  • Production Impacts: Although there have been some reported processing issues related to seafood, the issues experienced in the seafood sector to date have not been as difficult as that seen in slaughterhouses. Certainly, social distancing has impacted the sector and is adding to costs, but so far material supply shortages due to the pandemic have not been seen.
  • Food Service Outlook: The sector will likely be hard hit by the pandemic going forward; at its point of deepest impact over 8.0 million restaurant workers were laid off or furloughed, and industry revenues in April were reported to be 50 percent off from April 2019 at $32 billion in sales according to the National Restaurant Association. For the month of May 2020, 1.37 million of the furloughed workers were reported to have been rehired. From mid-April to mid-June, restaurants in most states had reopened in some form. Even some of the hardest hit states, such as New York and New Jersey have begun to reopen this sector. Restaurant visits hit a low point as of the week of April 12, 2020, being off over 40% from pre-pandemic levels, according to research firm NPD Group. By the week of May 24, 2020, rates had recovered over 50 percent of that decline and were back to within 18.8 percent of normal levels according to available foot traffic metrics. Almost all restaurant openings in the United States have been allowed with varying levels of social distancing protocols in place, including masks, occupancy limits, and other requirements. It is estimated that there will be an occupancy reduction of 25 to 50 percent due to social distancing requirements for on-premise dining going forward. Overall, consumers remain cautious in relation to eating out. By some estimates, 30 percent of restaurants in the United States are projected go out of business because of the pandemic.
  • Valuation Outlook: From a valuation perspective, Gordon Brothers has seen some weakness in shrimp and lobster prices, but overall demand, especially on the grocery side, has been strong, somewhat balancing weakness in food service. Gordon Brothers expects a decline in recovery in the food service segment and an improvement or stability in retail going forward.

 

COVID-19: Industry Brief Meter - Seafood

FORESTRY

SAWMILLS – LUMBER Updated August 27, 2020

  • General Market Conditions: The market is benefiting from three key trends at this time: (1) the pandemic is improving the demand for single-family residential construction as homeowners consider a transition to less densely populated geographies; (2) with homeowners spending more time at home, repair and remodel spending continues to strengthen as homeowners invest in existing homes; (3) housing supply has fallen due to the lingering impact of the Great Recession as well as demographic changes.
  • COVID-19 Impacts: Although deemed essential in both the U.S. and Canada, building products distribution and lumber mills in impacted areas were shut down in March.
  • Pricing Sentiment: The U.S. Federal Reserve Board reported that as of July 2020, the wood products industry was running at a capacity utilization of 70.6 percent, which was well above April’s level of 64.2 percent, but below the 76.9 percent seen in February, and off from the July 2019 level of 77.4 percent. As a result of the capacity issues as well as the robust demand, prices have been rising since April for most grades of lumber and structural panels. As of August 21, the Random Lengths Framing Lumber Composite Index was at a reading of $817, which was 134.1 percent higher than 12 months prior. Considering that pricing plummeted to a 2020 low in early April, the rate of the price increase has been historic, with traders saying that they have not seen a rise “comparable to the current one in their careers.” The index began the year at $375 and declined to $348 by April 10, before recovering.
  • Valuations Outlook – Inventory: Inventory appraisal values for lumber and logs will be impacted from a pricing perspective, but on a mark-to-market basis should be stable.
  • Valuations Outlook – Machinery & Equipment: The impact on equipment assets in the space will depend on how the recovery from the COVID-19 pandemic plays out over the next six months to a year. Prior to the advent of the pandemic there was already surplus equipment in the marketplace along with a surplus of older sawmill equipment (pre-2000). The market was stable for newer equipment (20 years or newer). At current volume levels, equipment values will be negatively impacted in the short term. Recent market contacts have noted, “this shutdown will affect the overall industry for at least six months,” although the recent price hikes have spurred inquiries for equipment in the marketplace as mills consider new equipment to support higher volumes. Once the immediate impact of COVID-19 has passed, the level of excess production capacity in the marketplace will drive additional surplus equipment to the secondary market. The impact of these additional surplus volumes will need to be reassessed at that time.

Inventory

Industry Brief Projected Values – Forestry: Sawmills-Lumber
 


Machinery & Equipment

COVID-19: Industry Brief Meter - Lumber - M&E

MEDICAL

PHARMACEUTICAL Updated July 1, 2020

  • Market Sentiment: The coronavirus has had a significant impact on health care spending and trends. Spending for non-essential medications has fallen, but investment in a potential COVID-19 vaccine and treatment has soared. While most of the recent news and events in this space have been linked to potential vaccine development and treatment options related to COVID-19, the basic pharmaceutical marketplace remains intact. Pharmacies are considered essential services, and remained open throughout North America during the shutdown, with home delivery options expanding since March 2020. 
  • Drug Pricing Increases Continue: Branded and generic pharmaceutical industry revenues are forecasted to increase at annualized rates of 3.0 percent and 2.6 percent, respectively, through 2025, despite attempts by the federal government to regulate drug pricing. Recent pricing pressure has resulted in scrutiny on price hikes and general margin compression, especially in the generic sector. Pharmaceutical pricing in the United States increased by an average of 5.1 percent over the past 10 years, but by just 1.7 percent through May 2020.
  • Supply Chain Concerns: Recent concerns regarding the quality and efficacy of generic drugs and the reliance on overseas supply chains may have a meaningful impact on the pharmaceutical industry in the future. It is likely that, due to the supply chain concerns brought to light by COVID-19 as well as underlying concerns related to quality, the next few years will see a diversification of the global pharmaceutical supply chain and a rise in regulatory pressure to bring some of the supply chain back to North America.
  • Civil Action Ongoing: A multijurisdictional civil action is ongoing against pharmaceutical manufacturers and distributors involved in the opioid space. Several legal actions were filed against distributors of opioids resulting in major criminal convictions and settlements in 2018 and 2019, as well as an ongoing criminal case involving a major manufacturer.
  • Opioid and Pricing Reform on Hold: The diversion of the attention of the Food and Drug Administration and other governmental agencies to coronavirus-related issues may have a slight positive impact on distributors under pressure due to opioid-related litigation and pricing reforms for generic drugs. Legal and regulatory pressure may ease as governmental resources are assigned to other areas due to the pandemic outbreak. 
  • Valuation Outlook: In Gordon Brothers’ view, with the exception of product-level demand spikes, valuation dynamics for both machinery and equipment and inventory in the space remain relatively unchanged due to COVID-19.
     

COVID-19: Industry Brief Meter - Pharmaceuticals - M&E

Medical Imaging Equipment Updated July 1, 2020

  • COVID-19 Impact: The COVID-19 crisis has caused volatility within the healthcare space because patients have delayed elective procedures.   Magnetic resonance imaging (MRI) is expected to see reduced demand, as a significant proportion of scans are for non-life-saving procedures.  According to recent estimates, the number of MRI outpatient imagining procedures has decreased by as much as 70 percent, according to the Radiological Society of North America.  In the short term, this will impact equipment values.  However, many of these treatments are necessary for patient healthcare, so a return to normal volumes in the long run is expected.
  • Global Growth Rate Forecast: The global MRI systems market is expected to experience a 6.2 percent compound annual growth rate through 2027, driven primarily by an aging population and technological advancements that make MRI an efficient diagnostic tool.
  • Market Dynamics: Demand for all types of medical equipment is linked to basic demographics, which will be unchanged in the medium and longer term. Long-term pricing pressure concerns about the cost of medical care will continue to pressure this industry.
  • Value in Refurbished Machines: Gordon Brothers has seen rising acceptance of refurbished machines in major medical centers and hospitals in the U.S., in addition to those in Mexico and South America, among others, as medical service providers seek to reduce costs. Some global markets have seen decent demand, offsetting U.S. consolidation. For example, Saudi Arabia, which is in the midst of privatizing its healthcare system.
  • Secondary Market Condition: Over the last 12 months, Gordon Brothers has seen a weakening of the export market for certain types of used medical equipment due to weaker economic conditions in the rest of the world as well as technological obsolescence trends.
  • Valuation Outlook: In terms of appraised values for both machinery and equipment and inventory, we do not expect there to be any negative impact due to COVID-19, other than short-term operating issues due to social distancing or logistics issues.

Metals

Aluminum Updated June 11, 2020

  • Market Dynamics: Because the aluminum market is worldwide, it is subject to price fluctuations resulting from regional and global supply disruptions and economic activity, especially in the key industries that are the primary market for aluminum. These include transportation applications (39% of U.S. market), packaging (19%), construction (14%), electrical (9%), consumer durables (8%), and machinery (8%), among others. Supply is provided by a combination of domestic suppliers, imports, with a significant amount of volume also coming from recycling sources; there are only a handful of companies in the United States providing a primary source for aluminum.
  • Pricing Metrics: The Platts Aluminum Midwest Premium, which benchmarks U.S. pricing over the London Metal Exchange price, shrank to its lowest level in 32 months in May 2020 due to weak market conditions. Pricing recovered a fraction in June, as the market began to see some small signs of life. Market conditions were weak throughout April and May as the automotive sector was shut down and other industrial sectors were weak. Market commentary in April among traders related to the volume of material heading to urn makers due to COVID-19. Market participants report slowly increasing demand for June with expectations of the market firming considerably in July. Aluminum billet prices for Midwest delivery as of early June had recovered about 12 percent from lows reached in mid-May. Average billet prices for April and May were about 18 percent off January 2020 averages. Through June 10, average prices were 13 percent off the January benchmark.
  • Key Customer Closures: Impacted heavily by assembly plant shutdowns in the automotive industry, aluminum has also been impacted by weakness in the commercial aviation sector, which has been hammered by the lack of passenger demand, regional travel restrictions, and non-essential worker orders. The total closure of the Boeing assembly plants in the Puget Sound area in April and May, and weaker prices in the Asian marketplace and Europe, have also contributed to weaker pricing and volumes. Recent re-openings in all sectors have improved market sentiment, but actual transaction volumes remain weak.
  • Valuation Metrics: Gordon Brothers expects a decline in inventory appraisal values based on pricing direction, a reduced order book going forward, as well as delayed and cancelled orders. Uncertainty and dim market sentiment will weigh down values as well.
     
COVID-19: Industry Brief Meter - Aluminum

Copper Updated June 11, 2020

  • Pricing Metrics: Copper prices reached a multiyear low for the week of March 30, 2020, amid coronavirus concerns, including the closure of the London Metal Exchange’s physical trading floor for the first time since World War II because of efforts to slow the spread of COVID-19. Prices have recovered somewhat with average prices in early June 2020 at 16.8 percent above the low daily close reached on May 30, 2020. However, June averages remain 8.0 percent below the January average for LME Copper Grade A. Copper scrap supply has been tight throughout the COVID-19-related business closures, as industrial collection activities have been reduced. Tightness in the scrap market is contributing to the market firming for copper cathode.
  • Key Production Closures: Mining curtailments were announced by mining companies Freeport McMoran and Vale in late March and early April 2020. Global mining group Rio Tinto reported that its copper production for the first quarter of 2020 was 8.0 percent below 2019 levels, adding that an earthquake in Utah had halted production at its Kennecott mine in late March.
  • Macroeconomic Impacts: Although demand in China was picking up as of March 2020 after an approximate two-month halt in industrial activity, concerns about markets in the rest of the world because of the still expanding pandemic, including the United States, Europe, and other regions, continue to weigh down the market.
  • Valuation Outlook: Gordon Brothers expects a decline in inventory appraisal values based on pricing direction, a reduced order book going forward, as well as delayed and cancelled orders. Uncertainty and dim market sentiment will push values down as well. While a decline in equipment value is expected in the short to medium term, the longer-term prospects of the industry should be unchanged by COVID-19.
Industry Brief Meter - Copper

Scrap Metal Recycling Updated June 11, 2020

  • Recovering Market Sentiment: The industry reported a very weak pricing environment with scrap prices dropping significantly in early April in conjunction with falling primary metal prices and precipitous declines in industrial activity. Additionally, collection activity was curtailed by the coronavirus and the resulting industrial plant shutdowns in the automotive and aviation sectors. Although automotive plants began reopening in late May 2020, scrap prices remain tight due to lags in the supply chain resulting from COVID-19 containment measures. According to the Institute for Supply Management, U.S. factory output fell in April to its lowest level in at least 72 years. Analyst firm Argus predicts that full recovery to prime scrap flows could take until the second half of 2020 depending on the capacity levels of auto production and the pace of the recovery in manufacturing activity.
  • Copper Situation: Signs of tightening are evident in the copper market; the discount off the COMEX cathode copper price for early June for number 1 bare bright copper had dropped to $0.06 per pound from $0.08 to $0.10 per pound in April and May and $0.10 to $0.14 per pound in March and February.
  • Aluminum Situation: Aluminum scrap prices are just beginning to firm up with an increase of about 5 percent seen in various grades by the end of the first week of June 2020.
  • Ferrous Situation: As of early June 2020, scrap steel prices remained well above the late March lows. Although prices as of the second week of June were up slightly from the end of May, some softness was seen in the marketplace at the end of the first week of June. Traders noted low utilization at several integrated mills, an overhang of shredded supply with expectations of significant product discounting, as well as relatively flat to weak forward-looking market expectations.
  • Valuation Outlook: Gordon Brothers expects a decline in inventory appraisal values based on pricing direction, discounts on obsolete grades, and increased logistics costs. Uneasy market sentiment will also weigh down values. 
COVID-19: Industry Brief Meter - Scrap Metal

Steel Updated June 11, 2020

  • Production Levels Declining: Industrial metal production is considered an essential industry nationwide, insulating it from shut down orders.  Despite this, concerns about over supply in the marketplace have triggered production reductions.  U.S. steel mill shipments for April 2020 (reported in early June) were off 29.9 percent from March 2020.  U.S. steel mill capacity utilization declined to 52.8 percent in April, down from 72.5 percent in March 2020 and down from 79.2 percent in April 2019.
  • Specific Capacity Cuts: U.S. Steel idled its Blast Furnaces #4, #6 and #8 at Gary Works; Blast Furnace A at Granite City Works; Blast Furnace #1 at Mon Valley Works; all of its Lone Star Tubular Operations; a significant portion of its of Lorain Tubular Operations; and its Keetac Iron Ore Operations.  As of early June 2020, none of these facilities had been reported to have been re-opened. ArcelorMittal also idled two blast furnaces indefinitely in early April, one in Indiana and one in Canada.  In addition, ArcelorMittal closed its iron mine in the Minnesota iron range as of May 3, 2020.  Cleveland-Cliffs is also closing its Northshore Mining operations in Babbitt and Silver Bay, while AK steel, which was recently acquired by Cleveland Cliffs, is scheduled to close its hot strip mill and the related annealing and tempering operations at its Dearborn Works plant in Michigan on July 5, 2020.
  • Pricing Metrics: Hot rolled prices reached a low in early May 2020 but recovered in mid to late May and into early June by about 11 percent through June 11, 2020.  Prices are still off about 15 percent from the January 2020 average, and are at levels that are unprofitable for many major steel mills.  While pricing was trending up, demand from the automotive sector was still weak, and many brokers were noting volumes were better but still at about 50 percent of normal, and it was reported to be a buyer’s market.  Not all the production for June 2020 was spoken for and orders for July, while ticking up slightly, were competitive.  Plate volumes were reported to be off by 40 percent and were similarly weak but slightly improving.  Hot dipped galvanized pricing was better relative to hot rolled with some indication of recovery from HVAC manufactures and the construction, sector, but demand from the automotive sector was still well below normal.
  • Valuation Metrics: Gordon Brothers would expect a decline in inventory appraisal values based on pricing direction, a reduced order book going forward, as well as delayed and cancelled orders.  Uncertainty and dim market sentiment will also weigh down values.
     
Industry Brief Meter - Steel

Paper, Printing & Converted Products

Printing Equipment Updated March 31, 2020

  • Market Dynamics: The market for printing equipment was weak before the COVID-19 pandemic evolved; it likely will take a further hit from faltering economic conditions, especially as in the short term, printing volume will likely materially decline in the second quarter of 2020.
  • COVID-19 Impacts: Although considered an essential industry, early reports from March 2020 indicate that first-class mail and postal shipping volumes are down, which is likely a bad sign for the industry. The Sinclair Printing plant in Los Angeles, California, was closed by its parent CJK Group in mid-March, laying off most of the staff, finishing work-in-process, and transferring the remaining materials to other CJK Group plants. Management noted that the decision to reopen the plant was to be evaluated “when or if, it is beneficial to continue the Sinclair Printing Operation.” In February 2020, Gordon Brothers’ equipment dealer contacts reported “business as usual” including steady depreciation to large printing presses, with some concern around reports of the coronavirus emanating from China. Until COVID-19 hit, domestic equipment dealers were hoping for an uptick in printing leading up to the 2020 election.
  • Valuation Outlook: Once the immediate impact of COVID-19 has passed, the amount of excess production capacity in the marketplace will drive additional volume to the secondary market, and the level of surplus equipment on the market will need to be reassessed at that time.
COVID-19: Industry Brief Meter - Printing

PULP & COMMERCIAL PAPER Updated March 30, 2020

  • General Market Dynamics: The packaging side of the business should be strong, but reduced industrial demand due to a COVID-19-related recession will likely weigh on demand over the balance of 2020; reduced industrial activity in multiple sectors will negatively impact business especially with an expected recession in China forecast for 2020.
  • Direct COVID-19 Impacts: In the United States, the pulp and paper workforce, which falls under the forest products industry, has been considered an essential critical infrastructure workforce. Internationally, the pandemic is seen as a demand shock, and expectations are for a material drop in demand in the marketplace due to reduced economic activity worldwide. At the same time, some major mill closures and curtailments in Asia indicate there will be a supply shock as well.
  • Pricing Sentiment: U.S. boxboard prices were flat for March 2020, with some sectors reducing orders while demand was strong from the food and pharmaceutical industry. While paper prices also seemed to be steady as March closed out, demand was reported to be faltering towards the end of March according to forest products market analyst Fastmarkets RISI. Certain publications temporarily switched to all electronic formats in early 2020, which will likely weigh on paper demand in the coming months, although magazine sales demand was anecdotally reported to be high in the initial rush buying that went into effect when stay-at-home orders were enacted in mid-March. In the pulp marketplace, demand for hygiene, household, medical, and food packaging have been strong, and automotive, aerospace, and segments within retail have been negatively impacted.
  • Valuation Outlook: Inventory appraisal values for pulp and paper will likely be impacted from a pricing perspective to the extent that market pricing dips in the coming months, but on a mark-to-market basis values should hold up. To date, Gordon Brothers has not seen a material drop in pricing. The impact on equipment assets in the space will depend on how the recovery from COVID-19 plays out over the next six to 12 months. Prior to the COVID-19 pandemic, there was already surplus equipment in the printing marketplace, and it is unlikely that the disruption will positively impact the marketplace on a short-, medium-, or long-term basis. Prior to the COVID-19 outbreak, the pulp market had been soft due to economic softness in Asia and Europe. 

Inventory

COVID-19: Industry Brief Meter - Pulp and Paper Inventory
 


Machinery & Equipment

COVID-19: Industry Brief Meter - Pulp and Paper Machinery & Equipment

Retail

Auto Parts & Accessories Stores Updated August 26, 2020

  • Market Dynamics: The aftermarket automotive industry is generally counter-cyclical and will do well in a recessionary environment, as car owners defer purchases of new vehicles and continue to drive and repair existing vehicles for longer periods. During the pandemic, reduced levels of driving have had a negative impact on the space, as demand for mileage-driven maintenance is down. Going forward, commuting in a private vehicle is perceived to be a safer alternative than public transportation, which should have a positive impact on vehicle ownership and usage and maintenance trends.
  • COVID-19 Impacts: The automotive repair sector was considered an essential service allowing repair shops, retailers, and distributors to remain open even in the face of stay-at-home and nonessential business closure orders. This has mitigated some of the worst impacts of the pandemic on the industry, as it has been able to maintain its business and workforce throughout the crisis.
  • Retailer Performance – Advance Auto: Advance Auto reported its second quarter results on August 18, 2020.  Sales were up on a sequential basis and on a year-over-year basis with comparable same store sales increasing by 7.5 percent.  Management noted that the company “benefited from a surge in industry demand in the quarter fueled by the government stimulus, unemployment benefits, and the impact COVID-19 had on consumer behavior in terms of how they repaired and maintained their vehicles.”
  • Production and Sale of Aftermarket Parts Not Curtailed: Ford Motor Company closed all of its vehicle production plants in North America from April through mid-May but kept its MOPAR aftermarket parts arm open. Likewise, Pep Boys, AutoZone, and Advance Auto Parts have remained open ostensibly to service the need of first responders, but also to keep repair shops and individuals supplied. 
  • Supply Chain Issues: Although there were some supply chain issues in February and March 2020 related to the impact of the COVID-19 pandemic on China, most of these issues have since been resolved and have resulted in very few stock-outs. 
  • Industry Fallout: APC Automotive Technologies, an automotive parts manufacturer and distributor specializing in exhaust products, brakes, and chassis parts, filed for Chapter 11 Bankruptcy protection in early June, citing impacts on demand from the pandemic, as well as supply difficulties in its catalytic converter segment related to palladium and rising prices. 
  • Valuation Outlook: Gordon Brothers believes that this segment will see little overall impact from the COVID-19 pandemic and that appraisal values should be stable in this space. In addition, for the balance of 2020, given the recessionary economic conditions that will likely persist for at least a portion of this period, it is anticipated that there will be a demand pickup in the space.

 

Industry Brief Projected Values - Auto Parts and Accessories

Department Stores Updated September 4, 2020

  • Market Dynamics: The decline of traditional shopping malls and the move to more accessible outlet stores and online shopping continues to impact foot traffic for traditional department stores. This trend was in place prior to the coronavirus pandemic outbreak, with department store sales dropping by 5.7 percent in the United States, by 1.6 percent in Canada, by 0.3 percent in Europe, and by 0.2 percent in Australia for the 2014 to 2019 period.
  • COVID-19 Impacts: Guidance from the U.S. Department of Homeland Security indicated that the department store sector was generally not considered essential infrastructure during the pandemic-related shutdown period, leading to the closure of a significant number of traditional department stores in the United States, including Macy’s, Nordstrom, Burlington Stores, Stage Stores, Saks Fifth Avenue, Sears, Kohl’s, and JCPenney. 
  • Bankruptcy Concerns: Camilla Yanushevsky, a retail stock analyst for investment research firm CFRA Research, said the fallout for retail will be “pretty striking” after several years of mass closures. “It’s a battle of who’s going to survive, who’s just going to close and who’s going to need to file for bankruptcy,” she said. “The companies that are most at risk are the ones that were already distressed before the crisis.” In 2020, five department store chains have filed bankruptcy as the fallout continues for the segment across value profiles from discount to luxury, including JCPenney, Stein Mart, Stage Stores, Lord & Taylor, and Neiman Marcus.
  • Store Closures: 
    • JCPenney: After years of accumulated losses and continuing sales declines, JCPenney filed for bankruptcy reorganization in May. The company is expected to close 242 stores permanently; however, was granted rent relief for June and July for approximately 600 ongoing locations. 
    • Stein Mart: Stein Mart is closing all 279 stores across the country. Stein Mart CEO Hunt Hawkins said the company was ultimately pushed to the brink by the coronavirus pandemic as its liquidity dried up and sales declined significantly. 
    • Stage Stores: Stage Stores, which had suffered financially for several years, is closing all locations and winding down company operations after failing to find a buyer after filing for bankruptcy in May. 
    • Lord & Taylor: Lord & Taylor is closing 19 of its 38 stores to make itself more attractive to a potential buyer after owner Le Tote filed for bankruptcy in early August. 
    • Neiman Marcus: Neiman Marcus is closing five of its namesake locations, as well as 17 of its off-price Last Call stores, according to court documents. The company came to an agreement with "a significant majority of its creditors," to be majority owners if the process, which is expected to eliminate approximately $4 billion of the company’s existing debt, wraps up as expected in the fall of 2020.
  • Valuation Outlook: How liquidation values hold up will in large part be dependent on what level of multiplier can be realized in a going-out-of-business setting in a recessionary economy while social distancing rules are in place and health concerns related to the coronavirus remain heightened, especially as it relates to indoor mall locations. 

Industry Brief Meter - Department Stores

 

Diamonds & Jewelry Updated August 26, 2020

  • Pre-pandemic Market Conditions: The diamond and jewelry business enjoyed a good start to 2020 following a fairly strong holiday season; however, pressures in the diamond business were unfolding prior to the COVID-19 crisis as rough diamond prices were under pressure from an oversupply of polished diamonds.
  • Inventory Levels: Large mining companies began to see goods go unsold, and customers pull back on purchasing as overseas markets were soft. Watch companies had been having very strong sales and most were rebounding from being depressed for several years. Wholesalers were trying to reduce inventory positions as lenders demanded better turnover and less aged inventory, which most tried to deem ineligible for borrowing. Aged inventory was moved to off-price retailers who enjoyed healthy sales at great value, which boosted the online off-price channel. 
  • Replenishment: Prior to COVID-19 retail jewelers were looking forward to the jewelry show season to restock inventory, and most had allowed inventory levels to decline post-holiday as long as sales volumes maintained. The industry will see many manufacturers unable to survive this crisis as payments for vendors will cease, demand for goods will be depressed, and the price of diamonds will decline due to liquidity, causing most dealers to buy less. Dealers and manufacturers with cash on hand will survive and will benefit from greater profits as they continue selling to retailers with the ability to pay for goods as agreed.
  • Valuation Outlook: In the short term, the industry will clearly be under pressure; however, jewelry markets have always been associated with celebrations, and should return to robust as the economy returns to normal.
COVID-19: Industry Brief Meter - Diamonds & Jewelry

E-Commerce Updated August 26, 2020

  • Pandemic Impacts: One sector seeing positive demand growth from the COVID-19 pandemic is e-commerce.  While the retail sector has been heavily impacted overall, as consumers remain largely at home, e-commerce, which was already a growing segment, has grown significantly in 2020. Per U.S. Census Bureau data, adjusted e-commerce sales increased 14.8 percent and 44.5 percent for Q1 and Q2, respectively, over last year.
  • E-commerce Surge: The pandemic caused a surge in e-commerce sales across a wide variety of platforms, accelerating growth in online sales by as much as four to six years.  As of May 2020, online spending was up 77 percent on a year-over-year basis according to Adobe Digital Insights.  The by-online-pick-up-in-store segment grew faster than the overall e-commerce channel, growing 195 percent in May.
  • Supply Chain: Although there were some supply chain issues related to delayed import shipments at ports and reports of some warehouses being closed due to regional COVID-19 issues early in the pandemic period, most third-party logistics operations were considered “essential critical infrastructure” by the U.S. government. Although delivery times have slowed compared to pre-pandemic levels, the channel is delivering significant growth.
  • Valuation Outlook: E-commerce should remain busy throughout the balance of the year, although there have been winners and losers based on the segment.  Segments seeing high growth are healthcare, grocery, toys and play equipment, home office, cosmetics, books, video, music, games, athleisure apparel; weaker segments have included shoes, some categories of sporting goods, diamonds, and certain segments of apparel.
COVID-19: Industry Brief Meter - E-Commerce

Grocery and Supermarkets Updated August 26, 2020

  • COVID-19 Impacts: Grocery stores struggled early in the pandemic to keep products on the shelves as the COVID-19 pandemic impacted meat production and other types of food processing and spurred a run on cleaning supplies and other household staples.
  • Retail Performance: Although social distancing had a negative impact on grocery stores in the early stages of the pandemic, most grocery stores are operating all departments now and are seeing significant quarter-over-quarter and year-over-year gains. Albertson’s Companies reported a sales increase of 21.4 percent for the 16 weeks ended June 20, 2020, compared to the prior year. The increase was driven by a 26.5 percent increase in sales, partially offset by a reduction in sales related to store closures and lower fuel sales. The company’s online grocery sales segment grew 276 percent for the same period.
  • Valuation Outlook: The grocery sector, which had been under pressure pre-COVID-19, has benefited from the crisis.  From an inventory valuation perspective, while there will be some volatility in department-level recoveries, Gordon Brothers anticipates a stable to strong valuation trend in grocery at this point.
COVID-19: Industry Brief Meter - Grocery

Home Improvement Stores Updated August 26, 2020

  • Pandemic Impacts: In most regions, home improvement stores were deemed essential businesses allowing them to remain open. Lumber product volumes were a bright spot, with companies capitalizing on project-oriented consumers at home due to the pandemic. Some distributors have continued to ship steadily to job sites where builders are trying to finish projects; however, plans were sometimes interrupted by changing regulations, as city, state, and federal officials reacted to the virus.
  • Housing Market Rebound: Monthly U.S. homebuilding rates increased for the third straight month in July 2020 with 1.495 million new starts, representing an increase of 17.5 percent over June. July starts increased 22.6 percent over June after falling 26.4 percent to a five-year low in April. Although starts for July remained approximately 7.5 percent below the January peak of 1.6 million, the positive trend bodes well for the industry, at least in the near term.  Another positive trend was in the number of building permits for residential construction issued, which increased 3.5 percent and 18.8 percent month-over-month for June and July, respectively. Similarly, after three months of declines (February through April), new single-family home sales also increased in June to a seasonally adjusted annual rate of 776,000, representing a 13.8 percent increase over the revised May rate of 682,000, and a 6.9 percent growth versus the June 2019 estimate of 726,000.  This rebound in housing construction and sales bodes well for home improvement retail sales in the near term, as homeowners look to make improvements and purchase items for new homes.
  • Retail Traffic Trends: Home Depot and Lowe’s both reported strong second-quarter earnings, following very strong first-quarter results. Both companies reported strong sales growth for the quarter ended July 2020, with Home Depot reporting 23.4 percent top-line sales growth and Lowe’s reporting 34.2 percent sales growth. Although incurring additional costs related to the COVID-19 pandemic, both companies saw organic sales growth despite cutting back on promotional activity.
  • Housing Market Demographic Trends: Companies are benefitting from demographic trends within the millennial generation, now entering the housing market and purchasing older, more affordable homes requiring renovation.  Based on information from the National Association of Realtors, millennials have accounted for 38% of all home buyers in 2020. This trend, while spurred by the pandemic, is expected to continue and is expected to be a multi-year pattern.
  • Valuation Outlook: Other than temporary impacts and commodity pricing issues due to the typical turnover profile, Gordon Brothers would not expect to see large declines in valuations. Special orders may be impacted, especially if construction or housing projects are delayed going forward due to COVID-19-related issues.
COVID-19: Industry Brief Meter - Home Improvement

Sporting Goods Updated April 14, 2020

  • COVID-19 Impacts: Considered essential critical infrastructure, sporting goods stores have remained open in most jurisdictions, although some stores reduced operations to curbside pickup for safety reasons. Sales were brisk in the last two weeks of March 2020 as stay-at-home and nonessential business orders kicked in and consumers stocked up on survival gear, propane, firearms, and ammunition. Although the sporting goods segment had been trending positively prior to the COVID-19 pandemic, the “essential” designation will assist stores by keeping operations and employee bases mostly intact. However, the likely extension of some level of social distancing well into 2021 will likely weigh heavily on the sector.
  • Specific Segments: Although running has been a popular form of exercise during this period due to gym closures, sales of running shoes have been negatively impacted and are trending lower on a year-over-year basis. For the week ending March 21, 2020, athletic footwear sales were down by 65 percent compared to the same period in 2019. Sport lifestyle and skate, the categories that were trending the best before COVID-19 affected the market, each declined by more than 60 percent for the same period.
  • Impact of School and Sports Closures: The closure of schools and professional sports has negatively impacted multiple segments including sporting apparel, footwear, and hardgoods.
  • Modell’s Going-Out-of-Business Delay: Concerned over the level of consumer traffic in the New York Tri-State area, a bankruptcy court authorized the Modell’s retail going-out-of-business sale to delay commencement for 75 days to allow consumer foot traffic to recover on the East Coast.
  • Dick’s Layoffs: Dick’s Sporting Goods, Inc. announced in March that it was reducing executive salaries as well as cutting back on its 2020 capital expenditure plan as a defensive tactic to conserve cash.  The company issued a further statement on April 7, 2020, citing specifically that due to fitness club closures and the cancellation of scholastic sports, the company would furlough a significant number of the workforce at its stores, distribution centers, and corporate headquarters effective April 12, 2020, due to the uncertainty surrounding the length of its store closures. 
  • Outlook: It is possible that scholastic and professional sports events and gym activity, both key drivers of sporting goods sales, will be suppressed for several quarters or longer, which will likely weigh down the segment. It is likely that the online sales share will accelerate as consumers use this channel more often due to retail store closures. Gordon Brothers expects that this will accelerate the growth of this sales channel in the long term.
COVID-19: Industry Brief Meter - Sporting Goods

Transportation

AEROSPACE - GROUND SUPPORT EQUIPMENT Updated March 31, 2020

  • Pre-COVID-19 Market Sentiment: The ground support equipment marketplace was positive at the end of 2019, based on record passenger travel and industry revenue.
  • COVID-19 Impact: With the anticipated downturn due to COVID-19, demand for this type of equipment will be materially impacted. Airport traffic levels have been hard hit by huge reductions in air travel. Airlines are anticipating that the impact of the COVID-19 pandemic will be even worse than the 9/11 terrorist attacks, the 2003 SARS epidemic, and the 2008-2009 financial crisis, and the impact of this will cascade to airports impacting the levels of equipment required on the ground.
  • Commercial Market Sentiment: The four largest U.S. carriers have adjusted their spring schedules downward to attempt to right-size demand. This has resulted in scheduling cuts of 40 percent at Southwest, 42 percent at United, 70 percent at Delta, and 80 percent at American. For March 2020, air passenger miles flown declined by 84.7 percent in the second half of the month. At these flight levels and at the flight levels that will likely be achieved in the second half of 2020, there is significant excess ground equipment capacity in the marketplace. It is hard to project at what level air travel will return, but it may hit 2017 or 2018 levels, or lower, by the end of 2020. Gordon Brothers assumes that commercial flights to some smaller, outlying airports will be curtailed for several years.
  • Valuation Outlook: From an appraisal perspective, Gordon Brothers believes equipment values in this sector will be negatively impacted for several years.
COVID-19: Industry Brief Meter - Ground Support Equipment

AIRCRAFT MANUFACTURING & INVENTORY TRENDS Updated April 24, 2020

  • Commercial Air Travel Reductions: Commercial aviation will be hard hit by huge reductions in air travel brought on by the pandemic. Airlines are anticipating that the impact of the pandemic will be even worse than the 9/11 terrorist attacks, the 2003 SARS epidemic, and the 2008-2009 financial crisis. The four largest U.S. airlines have adjusted their spring schedules downward to attempt to right size demand. This has resulted in scheduling cuts of 40 percent at Southwest, 42 percent at United, 70 percent at Delta, and 80 percent at American. Air passenger miles flown declined by 84.7 percent in the second half of March 2020.  The International Air Transport Association has forecasted that global passenger numbers will fall 55 percent this year compared with 2019.
  • Commercial Market Sentiment: At current flight levels, and at the flight levels that will likely be achieved in the second half of 2020, there is significant excess commercial capacity in the marketplace. It is hard to project at what level air travel will return, but it may hit 2017 or 2018 levels, or lower, by the end of 2020. This will have a negative impact on the sector and has negative implications for inventory and related equipment values.
  • Impact on Original Equipment Manufacturer (OEM) Production: Commercial flights dropped by 55 percent in the final week of March 2020 compared to 2019 levels, according to flight-tracking service Flightradar24.  Because of the dramatic slowdown in air traffic due to the COVID-19 travel restrictions, Boeing suspended production at its South Carolina facility that produces the 787 Dreamliner on April 8, 2020.  This followed the March 2020 closure of multiple facilities in the Pacific Northwest and Pennsylvania, which were extended indefinitely as of April 5, 2020.  Boeing reported deliveries of 50 commercial aircraft in the first quarter of 2020, as well as 39 defense-related aircraft. The company also reported orders for an additional 49 planes (most of them defense related) and 196 cancellations for the same period. Airbus paused production at its facility in Mobile, Alabama, through April 29, 2020, as well as its facilities in Germany.  Airbus also announced on April 8, 2020, that it was reducing its production rates for the A320 by 33 percent, the A330 by 66 percent, and the A350 by 40 percent.  Airbus reported delivering 122 aircraft in the first quarter of 2020.  For the same period, Airbus also booked orders for 356 aircraft and cancelled 66 orders.
  • Boeing 737 MAX Issues: On April 14, 2020, Boeing announced the cancellation of 150 737 MAX aircraft and removed another 139 737 MAX aircraft from its backlog, as their order status was in doubt. While it seems likely based on Boeing guidance that the 737 MAX-recertification approval will come through in 2020, certification flights were recently pushed back from May to August 2020. This additional delay was due to the ongoing Federal Aviation Administration review of the new software fixes. In addition, the channel for these planes is fairly full, both for Boeing and its suppliers. Therefore, while the recertification approval will be good for Boeing in the long term, it likely does not mean that activity on that platform will pick up materially in the short term. Further cancellations are expected in the coming months given overall business conditions.
  • Impact on Aftermarket Activity: For aftermarket demand, Gordon Brothers expects parts demand to falter substantially due to weakness in maintenance, repair, and overhaul (MRO) demand. A study released in late March 2020 by consulting firm Oliver Wyman estimated that “the total global impact of COVID-19 on MRO is estimated to be between $17B and $35B, a 19 to 39 percent reduction from our original $91B forecast for 2020.”
  • Impact on Defense Related Aviation: Gordon Brothers does not expect there to be a material impact on defense spending in 2020, and have seen reports that defense spending has actually increased as the government attempts to push stimulus to the economy.
  • Commercial Aviation Valuation Outlook: While it is difficult to gauge the impact of the coronavirus pandemic on appraisal values, Gordon Brothers expects it to be materially negative for both inventory and machinery and equipment. Gordon Brothers expects that on the OEM side of the business inventory values will decline due to reduced Tier I concentration and potential margin erosion, as well as commodity and general industrial weakness.  On the machinery and equipment side, computer numerical control (CNC) dealers are comparing the current market to 2008-2009 for used equipment.
  • Defense-Related Aviation Outlook: Gordon Brothers does not expect there to be a material impact on companies on the defense aviation side of the business, and accordingly feels values for inventory should be stable in this sector for 2020. Inventory valuation should be insulated as a result. For equipment, as much of it is sector-agnostic, weakness on the commercial side of the business and in other industrial sectors will bleed into this space, Gordon Brothers expects that values will decline.

Inventory - Commercial Aviation

COVID-19: Industry Brief Meter - Aircraft Commercial Aviation
 


Machinery & Equipment -Defense Aviation

COVID-19: Industry Brief Meter - Aircraft Defense Aviation
 


Machinery & Equipment - Manufacturing

COVID-19: Industry Brief Meter - Aircraft Manufacturing

AUTOMOTIVE – ORIGINAL EQUIPMENT MANUFACTURERS Updated  August 26, 2020

  • COVID-19 Impacts: The coronavirus pandemic has had a significant impact on automotive production and demand. Although U.S. sales were strong through February 2020, they dropped during the pandemic, reaching as low as 35.2 percent below 2019 levels in April, representing the sharpest year-over-year-decline since the financial crisis. In North America, over 45 production plants were closed, and production levels dropped to essentially zero in April (0.8 percent of February levels). By the end of June production had recovered to about two-thirds of normal levels. Sales demand also recovered swiftly with monthly sales levels recovering back to within 3.9 percent of the February level in May, and pent-up demand, expense cuts and Paycheck Protection Program money, helping many dealers turn a profit in the second quarter — some even boasting earnings records.
  • Production Curtailment: Manufacturers throughout the world and in particular North America closed plants and curtailed production in reaction to coronavirus safety concerns as well as demand forecasts and supply chain issues. In North America, the Big 3 automakers and others closed their North American assembly plants starting in late March 2020 until late April and into May 2020. Over 45 production plants were closed, and production levels dropped to essentially zero in April 2020 (0.8% of February levels) and by the end of June had recovered to about two thirds of normal levels.
  • 2020 Demand Outlook: The second quarter rebound has been viewed as a positive in the marketplace, however concerns about the impact of the current economic recession as well as high unemployment, and battered consumer confidence, is expected to have a negative impact on demand in the second half of the year. According to a blog post by KPMG, automotive production will not restart until the third quarter: “The ongoing spread and different reaction to the coronavirus in Europe will delay economic restart, despite the ongoing, slow Chinese economic restart. Existing market vulnerabilities (e.g., trade tensions, declining sales) are likely to persist into the third quarter given tight inventories (fewer than six weeks) and complex supply chains.”
  • Valuation Outlook
    • Inventory: From an inventory value perspective, there have not been any automotive models or lines discontinued to date, so while sales volumes at tier 1 and lower suppliers were materially impacted from March through May, production has resumed so inventory valuations for active product should not be impacted at this point. Any excess product would be impacted, and if a model is discontinued or order forecasts are adjusted, that inventory could also be impacted.
    • Machinery: Machinery and equipment values will be lower on a go-forward basis. While many auctions were cancelled in April, auction activity picked up in May and June. The auction marketplace is still functioning online, but volumes are down. We are likely to see continued transition back to onsite auctions into the fall.

Inventory

Industry Brief Projected Values – Automotive OEM Inventory
 


Machinery & Equipment

 Industry Brief Projected Values – Automotive Machinery and Equipment

COMMERCIAL TRUCKING AND TRAILERs Updated June 16, 2020

  • Market Dynamics: The commercial trucking and trailer industry has been in a difficult period over the last several years and had been contracting through 2019. Recent data from transportation industry firm Broughton Capital indicated that through the first three quarters of 2019, nearly 800 carriers went out of business, more than double the trucking failures in 2018. In February 2020, used Class 8 truck sales dropped 15 percent in volume, and average prices dropped 10 percent on a month-over-month basis, which was the 10th consecutive monthly drop in average price levels, indicating that the sector was weak going into the pandemic period.
  • Positive COVID-19 Impacts: COVID-19 has been a boon for select segments of the trucking industry and will likely remain so for several months. Although back hauls are down, rates are up in 63 out of 100 markets according to U.S.-based provider of transportation information DAT Solutions, with spot rates up 6.1 percent since February 2020. Fortune 500 provider of multimodal transportation services C.H. Robinson reported volume increases of 30 to 40 percent for retail food products and 15 to 20 percent for healthcare and produce in March. Dry van load-to-truck ratios (a measurement of relative demand in the industry) increased 11 percent week over week in the last week of March and were up 66 percent for the full month. In addition, regulations related to the number of hours a driver can work were eased in early April by the Department of Transportation in order to streamline deliveries of critical medical supplies.
  • Negative COVID-19 Impacts: Shipping companies with a heavy concentration in oil and gas, retail, and automotive industries have been materially negatively impacted by the COVID-19 business closures and stay-at-home orders. In a May 5, 2020, post, data analytics and forecasting firm, ACT Research’s (ACT) President and Senior Analyst Kenny Vieth noted that the frozen economy led “to a sharp drop in freight volumes and rates, as well as more empty miles from fragmented supply chains further impacting carriers’ profitability…” Although March was actually a strong month for trucking with the index measuring trucking volume inching up, there was a divergence among freight types, with freight to grocery stores and big-box retailers strong, but freight volumes way down in other supply chains, like that for gasoline, restaurants, and auto factories. It is expected that the April trucking levels were even lower as the impact of lower oil prices spread through the oil and gas industry and the full impact of the pandemic-related business closures were felt.
  • New Truck Production: According to ACT, as reported by Transport Topics, heavy-duty truck orders plunged 50 percent to 7,800 units in March from 15,783 in the same period in 2019. North American Class 8 orders took another plunge in April to an unprecedented level of 4,000 units, according to recent reporting from FTR Transportation Intelligence (FTR) and ACT. April 2020 order activity was the lowest since 1995, with FTR and ACT showing April to be 44 and 46 percent below March numbers and 73 and 72 percent lower than a year ago, respectively. ACT’s forecast as of April 7, 2020, was that Class 8 North American production will plunge to 134,000 vehicles in 2020 compared with 344,600 in 2019. In addition, multiple truck makers shut down production in late March and early April due to COVID-19 concerns, which has delayed some deliveries.
  • Logistical Issues: Although logistical issues are still present in various parts of the country and in ports, easing of shutdowns and the restart of the North American economy are expected to help select segments of the trucking industry in the latter portion of the second quarter and into the third quarter of 2020.
  • Used Trucking Trends: Class 8 used truck sales in March 2020 decreased 12 percent with the average price being down approximately $7,000 as compared with 2019 figures for the same period. This represented the 11th consecutive month of year-over-year price declines. “The industry is hard pressed to move units now,” ACT Vice President Steve Tam said. “That is due in large part not only to the economic hand we have been playing for the last year, but even in this March data, I think you are seeing a little bit of the impacts of COVID-19 creeping in.” Used trucking prices had been on a decline in 2020, but the reduction in new truck production and uncertainty in the direction of the economy may eventually benefit the used marketplace.
  • Oil & Gas Sector Impacts: Weighing against the positive news related to higher utilization in certain sectors is that fleets across the oil patches are underutilized and will likely be further idled over the next few months. It is uncertain as to when the oil and gas sector will rebound.
  • Valuation Outlook: After weighing all factors, Gordon Brothers believes that equipment values for this segment in the near term will be negative to stable given current market conditions.

 

Industry Brief Meter - Trucking and Trailers