Export Sales Decline For The 11th Month In Taiwan! Are We Going Into a Recession? Market Observation of The Plastic And Rubber Industry In The Second Quarter of 2023

The end of June and the beginning of August symbolises we are already halfway over 2023. According to the import and export statistics of the Ministry of Finance, Taiwan's exportation sales have reached the 11th consecutive month of decline, by the end of the second quarter the exportation has reached -18.1%, the second lowest point of the recent three years and the market is generally not optimistic that the export sales in the third quarter will be any major different.

Through personal interviews, we found that from the perspective of business owners, were originally expecting that after the epidemic de-escalation and after the border blockades are lifted in 2023, world economic activities would recover back to the time before the pandemic. However, the reality did not go as expected, despite it seems the aftershock of the pandemic is over, as the economic activities have gradually recovered, and the exhibitions are gaining more popularity, the actual amount of orders says otherwise.

 

Demand has yet to recover after the pandemic, resulting in a continuous decline in the exportation of plastic and rubber machinery

According to Reuters, the largest chemical producer in the world BASF issued a statement on the 12th of July stating that BASF’s earnings before interest and taxes (EBIT) in the second quarter dropped by 57% to €1.01 billion, down from €2.34 billion a year ago. They further stated that in the first half of 2023, global chemical production has shrunk significantly, and the growth of industrial production has slowed down. This year's EBIT is expected to be between €4.0 and €4.4 billion euros, far below the €6.9 billion in 2022.

In addition, German speciality chemicals giant Lanxess also publicly stated that it will revise its second-quarter and annual core profit forecast, also because global demand is still weak and has not increased significantly as customers continued to destock.

Several large index companies have also reported that their financial forecasts need to be revised. BASF even pointed out that there is a structural problem of weak demands in Europe. Where the EU originally expected that China, which accounts for 40% of global chemical demand, would recover after the Chinese authority lifted the strict restriction at the beginning of the year. To the EU’s disappointment, facing the difficult deflationary dilemma, it is almost impossible for the Chinese market to bring upward momentum to the global economy. 

The Taiwan Association of Machinery Industry released the June statistics of Taiwan's machinery and equipment import and export statistics. In June, the export value of machinery was 2.382 billion US dollars, an annual decrease for 11 consecutive months, dropping 22.5% from the 3.073 billion US dollars from a year ago. The export value of plastic and rubber machinery in June was only 66.11 million U.S. dollars, falling out of the top ten profitable categories of exportation in Taiwan. From January to June, the total annual export value was about 387 million U.S. dollars, ranking 9th in the export of major equipment.

From the revision of financial forecasts of several major global chemical companies to the poor performance of the data of the world's major economies, and to the 11-month decline in Taiwan’s machinery and equipment exports, it can be seen that the poor economy is still a reality, but what causes the global economy unable to return to its former glory after the pandemic? What exactly causes the decline in Taiwan and the global economy and are we going into a recession?

 

The situations are treacherous and unpredictable! The contraction of orders in the upstream, midstream and downstream of the manufacturing industry are inevitable

How bad is the economy? Looking at the recent screw and fastener industry, orders have been tightened for more than a year, and prices have been cut repeatedly. Recently, some manufacturers even received unreasonable demands for cutting the price from 8% to even 30% off from the upstream manufacturers. Leaving the processing factories with little profit margins of below 10%.

Many of these processing factories have adopted the system of three-day or four-day holidays abound. In fact, not only the screw and nut industry but almost all processing and manufacturing and mechanical equipment assembly factories in Taiwan are stuck in this "cold winter". The situation is really beyond everyone's imagination, in the instance of the fastener industry, they are known as the "rice of industry". Screws and nuts are used in all industries, and they can be said to be the index of the industrial economy, yet even they suffered from the recession and were forced to oblige to the poor profit margins below 10%. However, because the manufacturing industry covers a wide range, while the mechanical assembly is a little slower, and not all manufacturing industries are in the same economic conditions under the previous economic cycle, which means some manufacturers may feel the recession much slower than others. 

That being said, we notice the strangeness of the recession this time, the manufacturing industry has almost fallen from upstream to downstream. "I don't know when it (recession) will end, but the most frightening thing is that our past experience is completely useless." During a guest interview, a manager who has been in the industry for nearly 30 years said. "It stands to reason that even if they have secured doubled the number of gears in their inventory during the epidemic, in order to avoid broken supply chains, their inventory should have been digested by now, at least for the fastener industry, and the economy should have grown back, but it is completely quiet, and our price has to be cut again and again to secure the order… it's really weird."

Even the bicycle industry, auto parts, semiconductor industry, etc. are also facing the predicament of sharply reducing orders. Analysing the reasons for the contraction of orders, in addition to inflation, rising raw materials, the war in Ukraine, and excess inventory, the following factors may also contribute to the sluggish economy.

 

Weak demand, food crisis, and intensified international competition have all led to continued sluggish economic conditions

1. Global consumption decline

In early July, the Taiwan Institute of Economic Research reported that the Purchasing Managers' Index (PMI) of the manufacturing industry in Europe, America and China were all below the index reading of 50.0, indicating that global terminal consumption is weak and will continue to affect the performance of the global manufacturing industry. In particular, consumption in Europe and the United States has dropped sharply since the epidemic, and even after the restriction was lifted across the world, the index reading still sees no improvement. This will undoubtedly be the biggest and most serious impact on Taiwan's export industry and the heavily related plastic and rubber industry.

 

2. Food crisis threatens global markets

The Russo-Ukrainian War has disrupted the global food supply and pushed up food prices, coupled with the worsening extreme weather, causing havoc in many food-producing areas and further exacerbating the food shortage around the world. You may ask, how is the food crisis related to the shrinking market of the plastic and rubber industry? To answer that, we must understand the impact of hunger on the economy, according to the New York Times, in Kenya, Ethiopia, Somaliland, and Somalia more than half of their population suffered from starvation because of the disruption of wheat supply by the Russo-Ukrainian War. In Somalia, people spend nearly 60% - 80% of their income on food, for those countries suffering from starvation, they have no spare energy and capital to buy new, expensive products or machinery. Therefore, the food crisis is undoubtedly one of the reasons causing sluggish economic conditions.

 

3. Rising interest rates, exchange rates, and tariffs

Sino-US trade and more importantly the protectionism prevailing in countries all over the world have erected trade barriers making not only Taiwan experience a decline in economy, but it is also a common phenomenon experienced by all countries. The trade barriers simply worsen Taiwan's export situation, which is already struggling to survive in the cracks. The hard hit of the epidemic, the supply chain-breaking crisis, the energy crisis, and the shortage of labour and materials are all affecting Taiwan's export performance. Although the global epidemic has been slowly normalised, however, as the strong interest rate hikes in the United States, the exchange rates of various countries have fluctuated drastically, which is even more unfavourable for exportation. In addition, many countries wish to save the economy by closing the tariff gap caused by the epidemic, which makes Taiwan’s exported products even more difficult to compete with other local products.

 

4. Excluded from trade associations, Taiwan's export competitiveness becomes weaker

In this wave of recession, every industry across the world was forced to cut their prices to obtain orders for survival, but this method seems to be impractical in Taiwan because of the more favourable price of China, Vietnam, South Korea, Japan and other competing countries that are favoured by trade agreements. The Chinese and ASEAN have RCEP and the Taiwanese allies have CPTPP, both of which have excluded Taiwan. With low tariffs or no tariffs alone, there is a 5% to 15% price difference in comparison of these countries’ products with Taiwanese products. 

 

5. International competition is heating up

This year after the epidemic, the world's international trade activities have restarted. Taiwanese manufacturers are gearing up to recover their performance to the time before the pandemic as soon as possible, and the same story can be told in other countries. Many countries are actively carrying out technological innovation and industrial upgrading to improve the competitiveness of their products and services. The application of new technologies and improvements in production efficiency may allow countries to produce more competitive products, thereby taking market share that originally belonged to Taiwan.

 

6. The rise of plastic reduction and plastic restriction, hinders the performance of the plastic and rubber industry
Going back to our most relevant plastic and rubber industry, in addition to the above reasons, the global voice for plastic reduction and plastic restriction has greatly increased due to the gradual emphasis on ESG. As the EU calls out its goal of carbon neutrality by 2050, countries have also set their goals for carbon neutrality and plastic reduction. On June 22, the European Parliament passed the world's first Carbon Border Adjustment Mechanism (CBAM) regulation. Meaning in the future, companies wishing to export products to the European market must purchase CBAM certificates, paying for the carbon emission they made during production. The EU wish this regulation will encourage non-EU countries to reduce emissions and prevent carbon leakage risks. All these have greatly affected the development and performance of the global plastics and rubber industry, and Taiwan is no exception.

 

Conclusion

There's no doubt that the recession has come and we are all struggling with it, but when will this recession end? Could it be worse? In fact, the 11 consecutive decline in exports is not the longest recession record in Taiwan's history. In June 2016, it recorded 17 consecutive months of negative growth in exports, even longer than the 14 consecutive months of negative growth caused by the financial crisis that broke out in 2007.

Many economists say that it will be difficult to recover in the short term. Perhaps in the third quarter, some companies or markets will benefit from the wave of AI. There will be good demand and orders, but it may take more time to drive the recovery of the general plastic and rubber industry and the manufacturing industry. Some leading industries are expected to see the dawn in the fourth quarter of this year or the first quarter of next year.

It is not difficult to understand that the epidemic has caused great trauma to the global market economy. Even if the epidemic has slowed down, it will take a long time to recover back to the glory before the epidemic. The future will create a new business order and a new prosperity. It can be said that this is the worst era, but it is also the best era. It depends on who can grasp the timing of this reversal.