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S&P Global — 13 May, 2020

COVID-19 Daily Update: May 13, 2020

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By S&P Global

Hope glimmers in sections of the global economy even as the outlook for financial markets, supply chains, industries, and communities remain uncertain while countries begin to allow citizens to re-engage with life after lockdown.

Dr. Anthony Fauci, the U.S.’s top public health official for infectious diseases, warned a Senate Health Committee panel that if states reopen their economies too quickly, “paradoxically it will set you back – not only leading to some suffering and death that could be avoided but it could even set you back on the road on trying to get economic recovery. That would turn the clock back rather than going forward” because “there is a real risk that you will trigger an outbreak that you might not be able to control.”

In April, the U.S. budget deficit surged to $738 billion, according to the Treasury Department—a sign of the expansiveness of the federal government’s measures to provide fiscal and monetary relief to an economy in crisis. Last month also saw unemployment surge to 14.75%, the highest since the Great Depression, with 20.5 million jobs lost and labor force participation plummeting to 60.2%, near a 46-year low. However, some 3,400 people were hired as messengers, in information services, at the Federal Reserve, and within the federal government, according to S&P Global Ratings. Demand for professionals with restructuring experience is increasing, according to S&P Global Market Intelligence, as firms look to hire individuals who can perform credit workouts in anticipation of an outpouring in bankruptcy filings.

U.S. banks expect the federal government’s Paycheck Protection Program to be one of the few near-term opportunities in a landscape marred by weak loan demand—providing a primary source of revenue over the coming months and supporting existing at-risk borrowers from defaulting and increasing already substantial credit costs, according to S&P Global Market Intelligence. Banks also recognize that this funding will be short-lived, and that its success for businesses will depend on their standing at the conclusion of the lockdowns.

Of the more than 4.3 million COVID-19 cases confirmed worldwide, around 1.4 million are in the U.S., where more than 82,300 people have died, according to Johns Hopkins University data.

“With the crisis still spreading, the outlook is worse than our already pessimistic projection. Without medical solutions on a global scale, for many economies a more adverse development is likely,” International Monetary Fund Managing Director Kristalina Georgieva said yesterday at the Financial Times’ Global Boardroom online conference. “It is very important to concentrate on understanding clearly what protection measures we can offer to [emerging and developing] countries, so that a liquidity problem does not become a solvency problem.”

S&P Global Ratings now forecasts recessions to engulf Latin America, with GDP contracting 5% this year. While the depth of the downturn will be approximately three times that of the 2008-2009 financial crisis, its length will be shorter. Recoveries will be uneven and vary across countries depending on differing economic stimulus measures and pre-existing vulnerabilities. Notably, equity indices in the region rallied in April, though they remain in the red year-to-date. According to S&P Dow Jones Indices, the S&P Latin American BMI gained nearly 7%; the S&P Latin America 40 gained 5.2%; Chile’s S&P IPSA gained 14%; the S&P Brazil LargeMidCap returned 10%; Mexico’s S&P/BMV IPC gained nearly 6%; and Argentina’s S&P MERVAL Index returned a monumental 34.3%. High market volatility is expected to remain through year-end.

The energy industry has experienced similar volatility, especially in Asia, where countries are now suffering a strong second wave of new cases in the aftermath of lifting their initial lockdowns. According to S&P Global Platts Analytics, Asia's oil demand could drop by at least 3 million barrels a day year-on-year in the first half of this year. Inpex, Japan's largest upstream company, slashed its overall development, exploration, and other expenditures by almost a third to 219 billion yen ($2.04 billion) for this year due to the sharp decline in oil prices and demand. However, independent refineries in China's eastern Shandong province have average run rates that rebounded to 73.5% in April from 55.1% in March, with refineries boosting throughput due to higher margins, according to S&P Global Platts calculations based on raw data from Beijing-based information provider JLC. This marked the second consecutive month-on-month rise from a four-year low of around 44% in February.

Overall, the coronavirus crisis may have created a moment in the sun for sustainable energy. “Analysis by [the] IEA shows Europe’s emissions in 2020 will fall to the lowest level since the late-1950s. To avoid a big rebound, we need sustainable recovery plans based on smart energy policies,” International Energy Agency Executive Director Fatih Birol wrote on Twitter Monday. Supermajor ExxonMobil is experiencing a shareholder clash as the U.K.’s largest asset manager, Legal & General Investment Management, which holds an approximate $1 billion stake in the oil and gas conglomerate, argues the company isn’t doing enough to combat climate change. Likewise, in the U.S., the Trump administration has approved what promises to be one of the largest solar-plus-storage projects in the world with 690 megawatts of solar power capacity backed by 380 megawatts of energy storage, according to S&P Global Market Intelligence.

Today is Wednesday, May 13, 2020, and here is today’s essential intelligence.

Energy & Commodities in Crisis

Asian fuel suppliers desperate to get rid of excess supplies

India, South Korea and China have been accumulating unwanted gasoline, diesel and jet fuel inventories as consumer demand falters following the coronavirus outbreak. The major fuel exporters are actively seeking overseas outlets to clear their excess supplies, but may struggle to export in the second quarter as the number of willing buyers in the international market continues to dwindle. Asia's oil demand could drop by at least 3 million b/d year on year in the first half of 2020, according to S&P Global Platts Analytics. Reflecting the double whammy of tepid consumer demand and excess supplies hitting the regional spot market, the Asian oil product market structure has fallen deep into contango.

—Read the full article from S&P Global Platts

Japan's Inpex slashes 2020 expenditures by almost a third on low oil prices

Japan's largest upstream company Inpex on Tuesday said it has slashed its overall development, exploration and other expenditures by almost a third to Yen 219 billion ($2.04 billion) for 2020 as a result of the sharp drop in oil prices amid plummeting petroleum demand due to the COVID-19 pandemic. Inpex's revised expenditure is down 27.2% from its earlier plan of Yen 301 billion for its fiscal year ending December 31, with its capital expenditures for development, accounting for over 20% of the reduction and exploration investments dropping more than 40%, a company spokesman said.

—Read the full article from S&P Global Platts

China's Shandong independent refiners lift run rates to 73.5% in April

Average run rates at independent refineries in China's eastern Shandong province have rebounded further to 73.5% in April from 55.1% in March, with refineries boosting throughput due to higher margins, according to S&P Global Platts calculations based on raw data from Beijing-based information provider JLC. It was the second, consecutive, month-on-month rise from a four-year low of around 44% in February, only slightly lower than last November's record high of 73.9%. The higher run rates were mostly attributed to healthy domestic refining margins as feedstock costs plummeted in line with international crude prices, while domestic oil product prices have remained unchanged for months. The refining margins for cracking a basket of imported crudes grew Yuan 300 ($43) from March to Yuan 683/mt, theoretically, according to JLC calculations. JLC was formerly known as JYD.

—Read the full article from S&P Global Platts

COVID-19 may suppress global oil demand by 5 million barrels per day in 2021

Global oil demand may not recover to 2019 levels until at least 2022, Raymond James analysts said in a May 11 report offering their views of the "new normal" following the advent of COVID-19. For lack of an effective vaccine or treatment, the analysts expect the global oil market will take a 5.0 million-barrel-per-day hit to demand in 2021, followed by a 1.25 million-bbl/d hit each year thereafter, versus what demand would have been had there never been a COVID-19 pandemic. The analysts project that the jet fuel market will take a 2 million-bbl/d hit to demand in 2021, while the road transport market, comprised of gasoline and diesel, will take a 1.6 million-bbl/d hit. They project industrial and petrochemical demand will be 1 million bbl/d lower than it would have otherwise been, and the marine fuel market will be down 400,000 bbl/d as COVID-19 lingers.

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

Duke Energy prepared for worst-case economic scenario, CFO says

Duke Energy Corp. believes it has sufficient liquidity and a strong mitigation plan to offset the earnings impact and drop in retail sales prompted by the COVID-19 pandemic. Duke Energy on May 12 said it expects retail electric sales to fall 3% to 5% for full year 2020 based on a gradual economic recovery, which would negatively impact the company's 2020 earnings per share by 25 cents to 35 cents.

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

Energy Transfer to cut spending this year by at least $400 million as prices plunge

Energy Transfer plans to cut spending on growth projects this year by at least $400 million as a plunge in commodity prices and market demand due in part to the coronavirus pandemic contributed to a first-quarter loss versus a year-ago gain, the company said Monday. The operator of the Rover natural gas and Mariner East NGL pipelines in the US Northeast and developer of the proposed Lake Charles LNG export terminal in Louisiana has been hit hard like other midstream companies. In the months ahead, weakness in oil prices is expected to cause producers to continue to curtail drilling, resulting in short-term reductions in crude and associated gas volumes on its pipelines.

—Read the full article from S&P Global Platts

Pa. shale gas permitting plunged 46% in April

The number of permits issued for shale gas wells in Pennsylvania declined 46% in April compared to the same period a year ago, with publicly held drillers accounting for 84% of the new permits issued. Compared to the preceding month, permitting was off 36%, according to the latest data from the Pennsylvania Department of Environmental Protection. The slowdown in April drilling reflects the pressure on drillers to keep spending down and commodity gas prices that hovered around $2/MMBtu at national and local hubs amid warmer-than-expected winter weather.

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

ESG in the Time of COVID-19

Coal-fired generation stays longer, gas generation grows slower in new forecast

Coal-fired generation has been forecast to slow its decrease in share of US generation in S&P Global Platts Analytics' latest long-term forecast, compared with an earlier forecast, and natural gas-fired generation's share growth is also forecast to slow, but wind and solar output are forecast to accelerate. "This kind of renewable penetration has to go hand in hand with lots of storage installations," said Manan Ahuja, Platts Analytics' senior director of North American Power, in an email Monday. "If these forecasts prove accurate (or close to it), we would likely see a significant compression of on-peak/off-peak wholesale price spreads." The Platts Analytics North American Electricity Long-Term Forecast, issued May 4, extends the time horizon to 2050, compared with the October 22 forecast's 2040 time horizon.

—Read the full article from S&P Global Platts

US approves 1 of largest solar-plus-storage projects in world

The Trump administration has approved what promises to be one of the largest solar-plus-storage projects in the world. Owned by investment manager Quinbrook Infrastructure Partners LLC, the Gemini Solar + Battery Storage Project is under development by Arevia Power. The proposed project will have 690 MW of solar power capacity, backed by 380 MW of energy storage. Projected to cost $1 billion and located on U.S. Bureau of Land Management land 30 miles from Las Vegas, Gemini will be able to store and deploy more than 1,400 MWh that "can be used when the power is needed the most," the BLM said in a May 11 press release. David Scaysbrook, co-founder and managing partner of Quinbrook, said in a press release that the Interior Department's final decision to approve the project "clears the pathway for Quinbrook, and our development partners at Arevia, to accelerate completion of detailed project designs and procurement plans for one of the world's largest renewables projects ever undertaken."

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

INTERVIEW: ESG compliance essential to mining success: Phoenix Copper

Environmental, social and governance compliance is essential for the mining sector to improve its standing with shareholders, Dennis Thomas, non-executive director and VP of investor relations at Phoenix Copper, told S&P Global Platts in an interview. Thomas, who has been prospecting since 1984, said he had always had ESG on his radar and agreed that over the past couple of years the acronym had really taken the market by storm. Phoenix Copper is a base and precious metals exploration company operating in the US state of Idaho.

—Read the full article from S&P Global Platts

Listen: Heavy-duty trucks, buses offer fuel switching opportunities for hydrogen: Hyzon CTO

New fuel cell electric vehicle manufacturer Hyzon Motors has made rapid progress since forming in March, already signing an MOU with a UK partner to deliver 1,000 hydrogen fuelled buses. In this S&P Global Platts Commodities Focus podcast we talk to Hyzon's CTO, Ian Thompson, about the advantages and costs of FCEVs in buses and heavy-duty trucks compared with battery EVs, and opportunities for future growth.

—Listen to this episode of Global Oil Markets, a podcast from S&P Global Platts

3D-printed mini-organs may provide safe testing of COVID-19 therapies

While some technology companies have been using 3D printing, or additive manufacturing, to address the personal protective equipment shortage caused by the novel coronavirus, others are using 3D printing technology to create samples of human organs and tissues for coronavirus testing. As public health officials and philanthropists race to find treatments for COVID-19 — the respiratory disease caused by the novel coronavirus — researchers at universities and companies, like Novoheart Holdings Inc., are trying to speed up traditional drug and vaccine development processes without compromising patient safety by using 3D bioprinting. Like traditional 3D printing, bioprinting uses a device to construct a three-dimensional model created with a computer-aided design system. Instead of using plastic filaments, however, bioprinters use cells mixed with biocompatible materials, called bioinks, to create three-dimensional systems that act like human organs and tissues. These systems can then be deployed in tests by drug developers or, in some cases, implanted into the human body. This process of creating human organs and tissues out of pre-existing cells is not a new concept; the Wake Forest Institute for Regenerative Medicine produced new organs by hand for years for patient transplants, said Anthony Atala, the institute's director.

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

Banking Sector Under Pressure

Billions of dollars to flow to bank coffers from COVID-19 small business program

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Many banks expect the Paycheck Protection Program to act as a major revenue source over the coming months while also helping existing borrowers who are at risk of defaulting and driving up already heavy credit costs. PPP fees range from 1% to 5%, depending on loan size, and will largely be recognized as interest income in the next quarter or two as amounts borrowers use on payroll and other expenses are forgiven by the government and disappear from banks' books. Based on loan size data released by the government to date, aggregate fees have averaged 3.1%. That would represent $20.3 billion in total fees based on the full federal authorization for the program so far, and a far better return than securities yields across a yield curve pinned close to the zero lower bound. Some banks say participation in the program, while requiring long hours and a Herculean mobilization of staff, involves modest direct costs, and that they are not concerned about potential liabilities. Some banks also hope to use PPP loans with new clients to peel relationships away from large competitors that angered borrowers with long processing delays.

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

Banks have PPP protection but still must identify clear fraud, lawyers say

More fraud cases from the Small Business Administration's Paycheck Protection Program will likely come to light, and banks will need to do their part to help identify applicants' false statements, according to attorneys. The first such Justice Department claim — an instance of potential fraud discovered in Rhode Island — came relatively quickly, about a month after the program started April 3. According to an affidavit, an FBI investigation found probable cause that two suspects conspired to make false statements in their loan applications, making such claims as requests to pay employees of businesses that were not operating prior to the start of the COVID-19 pandemic in addition to other charges. The application was submitted to Middletown, R.I.-based BankNewport, which did not issue the funds, according to the affidavit. BankNewport did not respond to requests for comment. More such cases are expected as increased resources are put toward identifying potential fraud in PPP loan applications, attorneys said.

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

The Future of Credit & Market Volatility

Debt-laden AMC hopes to avoid default as Amazon, streaming sharks circle

AMC Entertainment Holdings Inc. is straining under its heavy debt load at a time when the future of the theatrical film model is being challenged by in-home streaming options and pandemic-related closures. Now, one of the country's largest video steamers may be circling the exhibitor to take advantage of the opportunity. Inc. approached AMC about an acquisition, according to a Daily Mail report, which would give Amazon a bricks-and-mortar link between its retail business, its streaming platforms and its production house Amazon Studios. The company has reportedly considered acquiring a theater chain in the past, and an acquisition deal could both spare AMC the pain of dealing with its $10.35 billion debt load and provide an option to stockholders otherwise facing cratering share prices. While analysts generally agree that a deal is unlikely, the speculation illustrates the difficulties AMC faces in the wake of the pandemic.

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

Auto insurer's smaller May credit reflects uptick in driving

Changing driving patterns in recent weeks offer a reminder of the fluidity of the situation facing private-passenger auto insurers as pandemic-induced restrictions ease in many U.S. states. In a development with implications for the future application of monthly premium credits, three of the nation's top seven companies in that business line have observed in recent days that the number of miles driven by policyholders have increased from late March and early April lows. Each of the top 15 private auto insurers have introduced some form of policyholder relief. In some cases, those issuing monthly premium credits have held open the possibility of continuing them beyond their initial limited terms to the extent the reduction in miles driven and, in turn, the number of accidents persists.

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

The Downs and Ups of Latin American Markets – April 2020 Review

Investment in Latin America’s equity markets is not for the faint of heart—now more than ever. In the first quarter of 2020, all markets in the region were significantly negative, plagued by recent events. While April has swung markets back to positive territory, we are still far from the proverbial “light at the end of the tunnel.”

—Read the full article from S&P Dow Jones Indices

S&P DJI’s Dividend Indices: The Importance of Incorporating Quality Screens

Over the last few months, the COVID-19 pandemic has taken its toll on the global economy in a way that no one could have expected. Unsurprisingly, many companies have had to reassess their dividend policy—in many cases resorting to cutting, postponing, or even suspending dividend payments. Against this background, it is beneficial to review the selection criteria of S&P DJI’s dividend indices. Not only do all of our dividend indices select constituents based on yield, but they also use a quality screen that focuses on their ability to pay dividends in the future. The quality screen varies with each index and is also dependent on the region. Simply because a company pays a high dividend (whether absolute amount or relative to its price) doesn’t always make it a wise investment. After all, a company paying too much in dividends may be left with little to no reserves in times of market turbulence; as a result, its dividends may be at higher risk for cancellation. Also, a high dividend yield may simply be a result of a decline in the company’s stock price, all else equal. These scenarios are often referred to as being “dividend traps,” and in order to avoid these traps, it is important to incorporate quality screens. This blog looks at three core dividend series offered by S&P DJI—S&P Dividend Aristocrats®, Dow Jones Select Dividend, and S&P Dividend Opportunities—with respect to their individual screening features to shed more light on the factors that each considers when selecting constituents.

—Read the full article from S&P Dow Jones Indices

Written and compiled by Molly Mintz.