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

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.

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

Chemicals

Industrial Chemicals Updated April 1, 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 has been identified as essential critical infrastructure by the U.S. Department of Homeland Security and is considered an industry sector critical to public health, safety, and economic and national security and is thus allowed to operate as normal, while following CDC workforce and customer protection guidance. Additionally, precursor raw materials chemical transport by truck has also been allowed.
  • Market Sentiment: The Chemical Activity Barometer, a leading economic indicator created by the American Chemistry Council, fell 8.0 percent in March 2020 following a 1.1 percent decline in February and a 1.2 percent gain in January. The decline in March was the largest in the post-World War II period. Worldwide production dropped by 2.4 percent in February following a 0.8 percent decline in January 2020, most of which was attributed to weakness in China due to COVID-19.
  • Petro Chemicals: With petrochemical feedstock pricing declining due to oil prices, many related chemical prices such as ethylene, naphtha, benzene, and propane have also dropped significantly. European ethylene prices for example, the key feedstock for a significant amount of plastic products, have dropped from approximately €800 per metric ton (MT) in January 2020 to approximately €625 per MT by the end of March. With feedstock prices at these levels, and worldwide economic activity expected to decline, these prices are expected to drop further in the coming months.
  • Other Chemicals: There has been some strength in a variety of chemicals, including hand sanitizers, alcohols, disinfectants, and multipurpose cleaners with retail demand in the United States increasing by a factor of 175 to 525 percent on a year-over-year basis in March 2020. Because of this skyrocketing demand, isopropyl alcohol, which is the primary ingredient in most hand sanitizers, pricing increased from $900 to $2,900 per MT.
  • 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 COVID-19 as well petroleum price volatility, Gordon Brothers believes that appraisal values for inventory on a mark-to-market basis should be relatively stable once the immediate COVID-19 marketplace impacts are resolved.
  • Valuation Outlook – Machinery & Equipment: For equipment values, Gordon Brothers expects that the price advantage enjoyed by many of the new ethylene plants located in the Gulf of Mexico region will be gutted by this level of prices. While these plants will still be competitive in the North American market, their ability to export ethylene worldwide, which was part of the value proposition for building new capacity, is going to be materially impaired at current price levels. Equipment values in other sectors will likely soften as well as economic activity slows, but this will need to be considered on a segment-by-segment basis.

Inventory

COVID-19: Industry Brief Meter - Chemicals Inventory
 


Machinery & Equipment

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

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 March 30, 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.
  • COVID-19 Impacts: As of March 25, 2020, construction had been considered an essential service in roughly 45 of 50 states, but labor, travel, and supply issues have slowed activity in the sector. A survey released by the Associated General Contractors of America on March 22, 2020, in response to the COVID-19 outbreak noted that 28 percent of member firms in the United States had already halted or delayed work on projects due to COVID-19, with a further 11 percent of respondents noting possible delays in jobs scheduled to start a month or more out. The cause of the delays was related to a shortage of government inspectors (20 percent), lack of job supplies and equipment including personal protective equipment (16 percent), and labor shortages (11 percent), among other factors. An increase in the number of delayed projects was expected in April.
  • 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 term. In the short term, the market would likely be 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. In addition, it is possible that a long-awaited infrastructure bill may be part of the multiple stimulus packages being considered in Congress to alleviate the economic impacts of the crisis, which if passed would likely have a positive impact on secondary equipment market fundamentals.
COVID-19: Industry Brief Meter - Concrete Batch Plants

Mobile Cranes Updated March 30, 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: As of March 25, 2020, construction had been considered an essential service in roughly 45 of 50 states, but labor, travel, and supply issues have slowed activity in the sector. A survey released by the Associated General Contractors of America on March 22, 2020, in response to the COVID-19 outbreak noted that 28 percent of member firms in the United States had already halted or delayed work on projects due to COVID-19, with a further 11 percent of respondents noting possible delays in jobs scheduled to start a month or more out. The cause of the delays was related to a shortage of government inspectors (20 percent), lack of job supplies and equipment including personal protective equipment (16 percent), and labor shortages (11 percent), among other factors. An increase in the number of delayed projects was expected in April.
  • Valuation Outlook: From a valuation perspective, the impact on mobile crane values will depend on how the construction marketplace weathers the current crisis in the medium term. In the short term the market would likely be 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 quick snapback in this industry in all regions except the oil patch once the COVID-19 pandemic passes. In addition, it is possible that a long-awaited infrastructure bill may be part of the multiple stimulus packages being considered in Congress to alleviate the economic impacts of the crisis, which if passed would likely have a positive impact on secondary equipment market fundamentals.
COVID-19: 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 March 30, 2020

  • Oil 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 of conventional plays.  Assuming no governmental intervention, this will materially reduce  new drilling activity to near zero within three to six  months and could potentially reduce existing production in western Canada, delaying completion on many already drilled wells.  
  • Market Prices: As frac sand prices as of February 2020 had dropped approximately 50 percent from 2018 levels, the industry was already weak prior to this latest 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 would expect 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 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. 
  • 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: Asset values for downhole tools and assets related to oil field E&P will be at depression levels during this period.  Though materially affected by COVID-19, this downturn may be longer lasting when coupled with the current Saudi-Russia price as prior OPEC price wars have lasted 12 to 24 months.  
  • 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.  Three oil well operators (Echo Energy, Sanchez Energy, and Whiting Petroleum) have filed for bankruptcy protection in 2020.  Additionally, EP Energy Corporation and Alta Mesa Resources’ exit from bankruptcy have been delayed due to oil market declines.  Two other drillers, Gavilan Resources, LLC and Hornbeck Offshore Resources, were reported to be nearing a bankruptcy filing as of early April 2020.  
  • Liquidation Market Happenings: Gordon Brothers has recently seen activity in the space and proposed on the orderly liquidation of an oil and gas servicing company, Tri-Point Oil and Gas Production Systems.  
  • Valuation Outlook: Gordon Brothers would expect that secondary market demand for anything other than ongoing well servicing equipment such as lift equipment or other niche sectors will go to near zero 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 March 30, 2020

  • Oil 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, and will potentially reduce existing production in western Canada, and delay completion on many already drilled wells. 
  • 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.  These facilities were producing various products but had a heavy focus on OCTG.  
  • 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 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: Distributors’ sentiment (as measured by PipeLogix) in the OCTG space turned sharply lower in March 2020, signaling a significant market contraction.  New Orders were down for all distributors and the price outlook score was very weak.  Fifteen straight months of declining prices, tariffs, and depression-level impacts on demand will have a crushing impact on this sector.  
  • Market Outlook: Asset values for downhole tools and assets related to oil field Exploration & Production assets will also be at depression levels while the impact of the coronavirus is still weighing on worldwide demand and the Saudi-Russian price war is ongoing.  The latest downturn, though materially affected by coronavirus may be long lasting if history is any guide as the four previous OPEC price wars all lasted 12 to 24 months.  The current level of production, though reduced worldwide in various regions, is currently materially higher than demand, which has resulted in excess levels of crude build-up to the point where worldwide storage is expected to be filled to capacity at some point in the second quarter of 2020.
  • Valuation Outlook: Concerning appraisal values from an inventory perspective, Gordon Brothers would expect a material drop in tier I volumes.  Additionally, we would expect tier II 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 May 13, 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: 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.
  • 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 continue as of mid-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 have all risen sharply on production constraints due to COVID-19-related processing plant outages. For the week ending May 10, 2020, cutout values for choice steers had risen to over $4.40 per pound, representing an increase of over 100 percent since February 2020. Conversely, slaughter levels for the same week dropped by 36.3 percent from prior-year levels. Similar trends have been seen with pork, with slaughter levels off 21.7 percent over last year for the week ending May 10, 2020. This represented significant improvement over the week ending May 3, in which slaughter levels were off by 34.5 percent over last year. While prices and profit margins have risen dramatically at packers and processors, sales levels are off due to a reduction in demand in the food service channel. In addition, livestock are bearing these disruptions, as a large number of animals have gone unsold with a significant amount of euthanasia occurring as demand for animals has declined. Nevertheless, the export outlook for 2020 is positive; while first-quarter 2020 export levels were below expectations due to the impact of the coronavirus on Chinese markets, the exports in the second quarter have been strong.
  • Other Impacts: The shortage in various meat and poultry products that has been evident in grocery stores over the last few weeks is perceived to be 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 are 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. However, ham and bacon prices have fallen in recent weeks due to reduced food-service demand, so inventories with large exposure in these sectors could be impacted.

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 May 13, 2020

  • COVID-19 Impacts: Gordon Brothers believes that the seafood industry will be somewhat insulated from the impact of the COVID-19 pandemic, as food consumption will continue despite the impact of the pandemic 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 pricing and demand volatility in the short term 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 40 percent from pre-pandemic levels as of late April 2020. Frozen shrimp and salmon have also seen significant weakness due to cratering demand from food service. In addition, a fair amount of shrimp from South America that would have gone to China in the first quarter of 2020 was redirected to the North American market. Consequently, shrimp prices for certain grades fell about 15 percent from February through the middle of March 2020 but have since stabilized. However, not all prices have dropped, as pricing for tilapia, which is typically sold in the frozen section at grocery stores, has held firm.
  • Food Service Outlook: There have been some dine-in restaurant re-openings in certain parts of the country with others anticipated for later in May, including:
    April 24:   Alaska
    April 27:   Georgia, Tennessee
    May 1:   Iowa, Oklahoma, Utah, North Dakota, Texas
    May 4:   Florida, Missouri, Montana, South Carolina (outside dining only)
    May 7:   Mississippi
    May 8:   California
    May 11:   Arizona, Arkansas, Indiana
    May 18:   New Hampshire

    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. John Sackton, founder of the SeafoodNews, noted the following regarding the latest consumer restaurant trends in his latest “Winding Glass” report, published on May 12, 2020, “The majority who will definitely avoid eating out has not changed and is down only 2 percent in the past two weeks.”
  • 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, balancing weakness in food service. Gordon Brothers would expect 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 March 30, 2020

  • General Market Conditions: Pricing was strong in the first quarter of 2020, but declined at the end of March due to concerns related to the coronavirus pandemic.  Projections for U.S. housing starts prior to the pandemic impact were expected to be 3 percent higher than in 2019 (1.6 Million units).  The first revised forecast has been for 1.3 million units with that number contingent upon the virus being contained by mid-April or early-May 2020.  Trading of soft wood lumber and structural panels slowed in the last week of March. 
  • 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.  While most shipped orders were accepted, according to Random Lengths’ March 27, 2020 market report, the spot market has dropped off, and a significant number of mills were either shut down or enacted production reductions. These curtailments were reported at over 15 Companies across Canada and the U.S., affecting a higher multiple of mill operations.  Many of the shutdowns or production reductions were scheduled for two to three weeks or are being revisited on a week-to-week basis. Weyerhauser announced it would initiate a 20 percent cutback on lumber production, a 15 percent reduction in oriented strand board, and a 15 to 25 percent reduction in engineered wood products. 
  • Pricing Sentiment: Pricing was at breakeven levels for several Canadian mills as of  March 20, 2020; however, in the first week of April 2020 ore prices throughout wood products markets declined by greater increments this week after climbing for much of the first quarter.  Export shipments have been hindered by port delays, and overseas market demand has been collapsing, especially in Europe.
  • Valuations Outlook: Inventory appraisal values for lumber and logs will be impacted from a pricing perspective, but on a mark-to-market basis should be stable. The impact on equipment assets in the space will depend on how the recovery from COVID-19 plays out over the next six months to a year.  Prior to the advent of coronavirus 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.”  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

COVID-19: Industry Brief Meter - Lumber - Inventory
 


Machinery & Equipment

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

MEDICAL

PHARMACEUTICAL Updated March 30, 2020

  • Market sentiment: Pharmaceutical demand is linked to basic demographics, but has been impacted in the short term by consumer and retail dislocation due to the coronavirus.  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 have remained open throughout North America, with home delivery options being expanded in recent weeks.  
  • Growth in E-commerce: E-commerce sales have been on the rise with average order values for online e-commerce pharmaceutical consumers increasing by almost 100 percent in March 2020 versus March 2019.  
  • 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.

Inventory

COVID-19: Industry Brief Meter - Pharmaceuticals - Inventory
 


Machinery & Equipment

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

Metals

Aluminum Updated March 31, 2020

  • Pricing Metrics: The Midwest Aluminum premium, which benchmarks U.S. pricing over the London Metal Exchange price, shrank to its lowest level in 25 months due to weak market conditions.
  • 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, as well as weaker prices in the Asian marketplace and Europe, have also contributed to weaker pricing and volumes.
  • 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 weigh down values as well.
COVID-19: Industry Brief Meter - Aluminum

Copper Updated March 30, 2020

  • Pricing Metrics: Copper prices reached a multiyear low for the week of March 30, 2020 amid coronavirus concern, including the closure of the London Metal Exchange's "Ring" - its physical trading floor - for the first time since World War II because of the U.K.’s efforts to slow the spread of COVID-19.
  • Key Production Closures: Mining curtailments were announced by Freeport McMoran, but weakness in automotive industry and concerns about future demand for durable goods that use copper, such as appliances, are weighing on the market.
  • Macroeconomic Impacts: Although demand in China is picking up 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 U.S., Europe, and other regions, are continuing weighing down the market.
  • Valuation Outlook: 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 order.  Uncertainty and dim market sentiment will push values down as well.  While we would expect a decline in equipment value in the short to medium term, the longer-term prospects of the industry should be unchanged by COVID-19.
COVID-19: Industry Brief Meter - Copper

Scrap Metal Recycling Updated March 21, 2020

  • Weak Market Sentiment: The industry reported a very weak pricing environment, and scrap prices are expected to drop significantly in April 2020 as industrial activity slows countrywide, additionally collection activity has been curtailed by the coronavirus and the resulting industrial plant shutdowns in the automotive and aviation sectors as well as other regional closures. 
  • Deemed Essential: The Department of Homeland Security updated its guidance for the week of March 16, 2020 week to include recyclers on its list of "essential critical infrastructure," thus allowing scrap operations to keep running in regions with coronavirus-mandated shutdowns.  Prior to this, the announcement of the Indiana 21-day stay-at-home order agitated the nonferrous market, dampening activity. 
  • Pricing Metrics: Through the week of March 21, #1 Heavy melt prices were off about 12.4 percent for the year, with lead down 12.3 percent, aluminum down 16.7 percent, and copper down 23.1 percent. 
  • Valuation Outlook: Gordon Brothers would expect a decline in inventory appraisal values based on pricing direction and discounts on obsolete grades and an increase in logistics costs.  Uneasy market sentiment will also weigh down values. 
COVID-19: Industry Brief Meter - Scrap Metal

Steel Updated April 8, 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.
  • Specific Capacity Cuts: U.S. Steel plans to idle a blast furnace at its Granite City Works in Illinois for 60 days; ArcelorMittal is also idling two blast furnaces, one in Indiana and one in Canada, indefinitely.
  • Pricing Metrics: Although orders were slowing in March 2020 due to expectations of lower prices in April, steel coil prices were fairly firm for the week of April 3 after sliding just under 10 percent from January 2020 highs.
  • Key Customer Closures: Automotive assembly plant closures and a general reduction in industrial demand indicated further weakness in the near future.
  • 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 weigh down values as well.
COVID-19: 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

Department Stores Updated April 20, 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 indicates that the department store sector is not considered essential infrastructure, which has sparked the closure of a significant number of department stores in the United States, including Macy’s, Nordstrom, Burlington Stores, Stage Stores, Saks Fifth Avenue, Sears, Kohl’s, and JCPenney.  That being said, some department stores such as Dillard’s have largely stayed open interpreting themselves to be “essential.”  In all cases the companies’ omni-channel e-commerce platforms have remained open.  In Canada, mandatory mall closures in Quebec and Ontario occurred in mid-March affecting several large Canadian department stores including Hudson’s Bay, Holt Renfrew, the Canadian branches of Nordstrom, and others.  In Europe, with the exception of grocery stores, pharmacies, and all stores in Sweden, a similar pattern has emerged with mandatory store closures of almost all types of stores, including department stores.  Major department store closures in Europe include Debenhams, John Lewis, Fenwick, Harvey Nichols, Harrods, Selfridges, Brown Thomas, Printemps, Galeries Lafayette, Galeria Karstadt Kaufhof, Müller, and De Bijenkorf.  Some department stores with large food operations, such as Marks & Spencer have remained open and transferred resources to food retail, food delivery, and online channels.  The COVID-19 impact in Australia has been somewhat muted in the sector, in that retail stores are allowed to stay open if they can comply with social distancing guidelines.  David Jones has kept 42 of its large-format stores open and closed three small-format stores, while Myer closed all of its stores for a minimum of four weeks beginning on March 29.
  • 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.”  Listed in this grouping in the United States are JCPenney, Sears, Neiman Marcus, and Stage Stores.  On April 15, 2020, JCPenney skipped a bond payment, which places it in credit default and activates a 30-day window in which it can explore its strategic options. On April 3, it was reported that Neiman Marcus has been exploring a possible bankruptcy filing, and on April 13, Standard and Poor’s downgraded the company’s credit rating.  Stage Stores is also reported to be in default of its credit agreements, is operating under a forbearance agreement, and is exploring its strategic options. In Europe, Debenhams has filled a “notice of intent” to appoint an administrator in the United Kingdom, and the German department store chain Galeria Karstadt Kaufhof filed for administrative insolvency on April 2.
  • Leadership Comments: On April 15, 2020, Steve Sadove, former CEO of Saks Fifth Avenue, predicted that sales discounts in the department store space will meet or exceed levels reached in the 2008–2009 recession. He also noted his concern regarding inventory levels, as he expects there to be excess inventory in stores across markets. Additionally, he expressed concern around consumer shopping behavior and expects to see many more store closures in the United States, as it currently has three times more retail square footage than Europe. Due to the impact of the crisis, he believes there will be a much lower demand structure for department stores by fall of 2020. Peter Williams, the former chief executive at Selfridges, reflecting on the impact of the Coronavirus Pandemic on the sector noted, “Some will survive, but not all… The switch to online during a period of virtually zero sales growth was putting chains such as Debenhams and House of Fraser under enormous financial strain. Coronavirus only compounds the problem and accelerates the inevitable outcome. If they weren’t bust before, they are now.”
  • Valuation Outlook: The biggest operating issue in the near term will be inventory mix and social distancing issues when stores are reopened.  Many spring seasonal products likely on hand in warehouses or stores will need to be closed out and new product sourced.  It is likely to be a slow restart and the number of shoppers in stores may need to be limited if new protocols are mandated for in-store shopping. Some share may be further lost to e-commerce during the pandemic closure period, which will weigh down same-store sales. How liquidation values hold up will in large part be dependent on three primary factors: what level of discounts are established as stores reopen and begin to closeout excess inventory; the inventory mix by store upon reopening; and 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 are endemic. 
Industry Brief Meter - Retail Department Stores

Diamonds & Jewelry Updated March 30, 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.
  • 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, which in turn enjoyed healthy sales at great value, boosting the online off-price channel.
  • 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 and Jewelry

E-Commerce Updated March 31, 2020

  • Pandemic Impacts: One sector seeing positive demand growth by the COVID-19 pandemic is e-commerce. While the sector has been heavily impacted as consumers are forced to stay at home, e-commerce has taken off. 
  • Instacart plans to hire another 300,000 full-service personal shoppers over the next three months, essentially doubling the size of its personal-shopper community. Over the last few weeks order volume has jumped more than 150% year over year, and average basket size has grown 15%.
  • Amazon has seen a similar increase in demand and has announced plans to hire an additional 100,000 workers. Although there have been some supply chain issues related to delayed import shipments at ports and reports of some warehouses being closed due to regional COVID-19 issues, most third-party logistics operations have been able to stay up and running due to being considered essential critical infrastructure by the U.S. government.
  • Outlook: E-commerce should remain busy throughout the recovery period although there have been winners and losers based on the segment. Segments seeing high growth are healthcare, grocery, toys, home office, cosmetics, books, video, music, games, certain segments of apparel; weaker segments have included shoes, sporting goods, diamonds, and certain segments of apparel.
COVID-19: Industry Brief Meter - E-Commerce

Grocery and Supermarkets Updated March 30, 2020

  • COVID-19 Impacts: Grocery stores are struggling to keep products on the shelves as Americans hunker down amid the coronavirus outbreak. Prior to multiple states announcing stay-at-home or shelter-in-place measures, people flocked to supermarkets to stock up on essentials. COVID-19 triggered a level of “panic buying” across the United States, with customers clearing shelves of toilet paper, canned goods, frozen foods, and proteins, among others.
  • Shifts in Operations: Multiple chains were reporting the closure of deli counters and self-service stations to free up staff for warehouse and transportation needs as they shift to keep shelves stocked and expand food delivery programs.
  • Additional Hiring: Despite limiting sales quantities on certain items as well as limiting hours for cleaning and restocking, demand is high at grocery stores as restaurant sector volume has cratered. Several grocery chains have announced large hiring plans in order to fill positions at stores and in distribution centers.
  • Valuation Outlook: The grocery sector, which had been under pressure over the last 12 months, will likely benefit from the crisis. From an inventory valuation perspective, while there will be some volatility in department-level recoveries, Gordon Brothers anticipates a stable valuation trend in grocery at this point.
COVID-19: Industry Brief Meter - Grocery

Home Improvement Stores Updated May 20, 2020

  • Pre-COVID-19 Market Sentiment: The home improvement industry is mature with several large players, including Home Depot, Lowe’s, and Menards, and multiple fragmented smaller competitors. Prior to the pandemic hitting, industry revenue was forecasted to grow 1.1 percent over the five years to 2025 on an expectation of continued expansion of the housing market and North American economy. The industry had been growing over the five-year period ended December 2019 at an annual growth of 3.8 percent supported by a housing market that had been expanding steadily since the recovery from the Great Recession began in 2009.
  • Pandemic Impacts: In most regions, home improvement stores were deemed an essential business 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.
  • Market Outlook: From an outlook perspective, the home improvement industry is driven by commercial and residential construction activity. The housing market was negatively impacted by the pandemic in March and April (refer to Building Products for additional information). While stores in this segment have been open, social distancing measures have limited foot traffic, and normal spring promotions have been limited in order to avoid driving high foot traffic to the stores. In addition, installation-related services have been limited in certain regions. 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. Garden center activity has also been reported to be strong, and one wholesaler in this space reported that sales to both Home Depot and Lowe’s were up in March on a sequential year-over-year basis by double digits.
  • Housing Market Impacts: COVID-19 has reduced residential and commercial construction activity. In most jurisdictions, existing construction has been 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.
  • First Quarter Results: Home Depot and Lowe’s reported first-quarter earnings on May 19,, 2020, and May 20,, 2020, respectively. Both firms reported strong sales growth for the quarter ended April 2020, with Home Depot reporting 7.1 percent top-line sales growth and Lowe’s reporting 11.1 percent sales growth. Although incurring additional costs related to the COVID-19 impact, both companies saw organic sales growth despite cutting back on promotional activity. Lowe’s noted that it closed on Easter Sunday as a benefit to its employees and cancelled its planned “Spring Black Friday” sale yet still increased sales volume, confirming that sales growth is currently elevated. Both companies cited an increase in do-it-yourself home improvement sales activity with customers catching up on projects that they had been deferring prior to the pandemic, which they now have time to complete, and both companies noted a significant increase in online traffic, with Lowe’s reporting a 150-percent increase in online sales in April on a year-over-year basis. Additionally, although both chains recognized that this may be a temporary phenomenon, they do not expect a decline in sales in the second quarter, although sales growth is expected to taper off from first-quarter levels.
  • Retail Traffic Trends: These sales trends were evident in retail foot traffic trends as well. According to data from location analytics and foot-traffic data platform Placer.ai, trends for the big three home improvement companies were very strong in the second half of April and into May with average store traffic for Home Depot, Lowe’s, and Menards increasing by 12.0, 26.9, and 17.2 percent, respectively, for the trailing 30-day period ended May 14, 2020. Some of this may be due to the limited number of stores open in most markets, as well as strength in home improvement and renewed interest in gardening due to the stay-at-home orders, but it is clear that this industry has fared well during the pandemic period.
  • Interest Rates: The interest rate adjustments made by the Federal Reserve Board in early March 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; however, 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.
  • 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.
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 aircrafts 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

AUTO PARTS AND ACCESSORIES Updated April 1, 2020

  • Market Dynamics: The aftermarket automotive industry is generally counter-cyclical and will do better in a recessionary environment as car owners defer purchases of new vehicles and continue to drive and repair existing vehicles for longer periods. As the coronavirus pandemic is likely to cause a worldwide recession, this is a positive factor for this segment.
  • Impact of the Great Recession on Aftermarket: The first eight months of the Great Recession (December 2007-June 2009) were strong months for auto parts sales, with an average sales growth of 2.8 percent over the previous year. At the same time, gross domestic product (GDP) was down 2.3 percent in the first quarter of 2008 and up 2.1 percent in the second quarter of 2008. The recession deepened in 2008 with GDP –down 2.1 percent in the third quarter and down 8.4 percent in the fourth quarter. However, the aftermarket still had an average monthly sales growth of 2.1 percent over the previous year.
  • COVID-19 Impacts: The automotive repair sector is considered an essential service allowing repair shops, retailers, and distributors to remain open even in the face of stay-at-home and or nonessential business closure orders. This will mitigate some of the worst impacts of the pandemic on this industry, as it should be able to maintain its business and workforce throughout the pandemic period.
  • Production and Sale of Aftermarket Parts Not Curtailed: Ford Motor Company, though closing all of its vehicle production plants in North America, has kept its MOPAR aftermarket parts arm open. Likewise, Pep Boys, Auto Zone, 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 COVID-19 on China, most of these have since been resolved and have resulted in very few stock outs.
  • Valuation Outlook: Gordon Brothers believes that this segment will see little impact from COVID-19, and that appraisal values should be stable in this space.
COVID-19: Industry Brief Meter - Auto Parts Retail

AUTOMOTIVE – ORIGINAL EQUIPMENT MANUFACTURERS Updated  April 11, 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 approximately 35 percent (seasonally adjusted) in March 2020 over last year, representing the sharpest year over-year-decline since the financial crisis. Several worldwide automotive production forecasts for 2020 have already been dialed back by 5 to 10 percent based on the early reads on the impact of the pandemic on consumer spending habits. The Conference Board’s Consumer Confidence Survey® declined sharply in March, following an increase in February. Lynn Franco, senior director of economic indicators at The Conference Board stated: “March’s decline in confidence is more in line with a severe contraction – rather than a temporary shock – and further declines are sure to follow.”
  • Production Curtailment: Manufacturers throughout the world and in particular North America have been closing plants and curtailing 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 for two weeks beginning in March. Both Ford and Toyota announced extensions of their closures through mid-April, with Toyota recently extending to early May.
  • Demand Outlook Weakening: Despite lower interest rates, faltering consumer confidence, nonessential business closures, and stay-at-home orders will reduce automotive demand and production in the second quarter of 2020 and likely beyond. 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 6 weeks) and complex supply chains.” While other forecasts are not so dire, it is clear this is going to have a major impact on sales levels. The latest projections from Edmunds estimate that annual sales levels in North America will decline by 35.5 percent in 2020, adding that sales in the third week of March had fallen by 80 percent as compared to 2019.
  • Impact on Merger and Acquisition: The pandemic is also affecting merger and acquisition activity with the Wall Street Journal announcing that BorgWarner Inc.’s planned acquisition of powertrain company Delphi Technologies PLC is at risk.
  • Valuation Outlook
    • Inventory: From an inventory value perspective, there have not been any automotive models or lines discontinued to date, so while Gordon Brothers would expect a short-term impact to sales at Tier 1 and lower suppliers, once production resumes, inventory valuations for active product should not be impacted. 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. The secondary market functioned through the first half of March with many sales going to online forums; however, the second half of the month saw a significant number of auction events cancelled or postponed. In the first week of April 2020, Gordon Brothers noted 21 postponed and cancelled industrial auctions. When non-essential business closures and stay-at-home orders are rolled back, Gordon Brothers expects the secondary market to resume near-normal functions; however, there will be a high level of dealer inventory to work through and likely more equipment coming to market due to plant closures and consolidation as a result of lower sales as production forecasts are revised lower in the second quarter and possibly beyond. Gordon Brothers noted that some sales of dealer equipment in March offered higher-than-normal discounts.

Inventory

COVID-19: Industry Brief Meter - Automotive OEM Inventory
 


Machinery & Equipment

COVID-19: Industry Brief Meter - Automotive OEM Machinery & Equipment

COMMERCIAL TRUCKING AND TRAILERs Updated May 15, 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 & gas, retail, and automotive 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 (ACT)’s 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. April trucking levels are expected to be even lower as the impact of lower oil prices spreads through the oil & gas industry, and the full impact of the pandemic-related business closures are 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: With logistical issues still present in various parts of the country and in ports, and with the unprecedented shutdowns, the restart of the North American economy is 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.
COVID-19: Industry Brief Meter - Trucking and Trailers