The first quarter of 2020 presented setbacks in the form of falling oil prices and simmering global trade tensions, putting liquidity to the test. And then came the biggest shock of them all — COVID-19. Like every other industry, the chemicals sector was also impacted by pandemic-related crises. Depressed manufacturing, whether from quarantine-related shutdowns or reduced short-term prospects in oil and gas, pressured revenue. Significant uncertainty around the timing of COVID-19 subsiding has also increased the difficulty of accessing capital markets.
However, history has shown us that chemical companies can take several steps to increase liquidity in the crisis, setting themselves up to take advantage of emerging opportunities.
A sector already under liquidity pressure
Liquidity was already under pressure in the chemicals sector. Revenue, which saw strong growth from 2016 to 2018, slowed in 2019. Gross margins started to erode across the sector in 2019, after seeing only modest growth in 2017 and 2018. These headwinds occurred simultaneously with a 13.2% compound annual growth rate in capital expenditures from 2016 to 2019.
All of these factors, both pandemic-related and those occurring over the last several years, point to a significant need for greater liquidity. Having a strong buffer of cash, combined with high cash conversion efficiency, will help companies survive the crisis, manage the next 6-18 months, and come out in a stronger position.