MEET THE SECTORIANS. Sector Risk Insights Economic Research. Paris 21 March Copyright Allianz

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1 MEET THE SECTORIANS Sector Risk Insights Economic Research Paris 21 March 2018 Copyright Allianz

2 AGENDA INTRODUCTION CET SECTOR RISK INSIGHTS What You Need to Know in Catharina Metals, Energy, Machinery - Marc Pharmaceuticals, Chemicals, Transportation - Sergey Retail, Construction, Textile - Maxime Automotive GOT QUESTIONS? Q&A SESSION Ask Us Anything Sector Risk webinar Economic Research Copyright Allianz 22-Mar-18 2

3 SECTOR RISK INSIGHTS What You Need to Know in 2018 Key Takeaways from the latest reports Ask us anything via Skype messenger answers at the end of this session For more info: ports Copyright Allianz 22-Mar-18 3

4 THE TEAM CATHARINA HILLENBRAND- SAPONAR Senior Sector Advisor for Thematic Research and Top Client Liaison Catharina joined Euler Hermes in September During 20 years in senior positions with a number of global investment banks such as Cazenove and Nomura, she advised on multi-billion M&A transactions and privatisations. Catharina continued her career as an official with the British government where she advised Ministers and Downing Street with leadership on a number of high profile national policies mainly focused on industry, finance and energy but also on Brexit. Focus areas: Energy, Metals, Machinery and equipment Did you know that? Catharina jogs during lunch breaks Catharina.HILLENBRAND-SAPONAR@eulerhermes.com Copyright Allianz 22-Mar-18 4

5 USD/t SECTOR RISK INSIGHTS METALS CYCLICAL MOMENTUM VS STRUCTURAL CHALLENGES US tariffs direct impact and mind the multiplier Commodities recovery base metals and mining sectors back to growth Steel overcapacity - credibility of management Benchmark steel prices 0 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Sources: Bloomberg, DOE, 19/01/2018 Catharina Hillenbrand-Saponar Copyright Allianz 22-Mar-18 5

6 J-12 D-12 M-13 O-13 M-14 A-14 J-15 J-15 N-15 A-16 S-16 F-17 J-17 D-17 M-18 O-18 M-19 A-19 SECTOR RISK INSIGHTS ENERGY GROWTH: NOW IN YOUR ENERGY SECTOR Oil: Demand is strong (global economic strength) but so is production (US vs OPEC) - the devil is in the detail Power/gas/renewables: The great recovery; decarbonisation; disruption Return to disciplined - growth US crude oil inventories and oil production forecast US inventories (mbbl, lhs) DOE crude oil production forecast (mbpd, rhs) Sources Bloomberg, DOE, 19/01/2018 Catharina Hillenbrand-Saponar Copyright Allianz For more info and analysis visit the webpage 6

7 SECTOR RISK INSIGHTS MACHINERY MOTOR THE ECONOMY Positive cyclical exposure to synchronised economic growth Sustained growth in all end markets Secular megatrend of robotics/ai Beware of risk from US metals import tariffs Key demand indicators: Industrial production and business expectations Sources: Bloomberg, DOE, 19/01/2018 China industrial output IFO Eurozone business climate expectations US industrial production Catharina Hillenbrand-Saponar Copyright Allianz 22-Mar-18 7

8 THE TEAM MARC LIVINEC Sector Advisor for industrial-oriented sectors Marc started working for the French subsidiary of Euler Hermes as a financial analyst until He then moved to the Economic Research Department where he has been developing in-house knowledge of several industrial (upstream) sectors. Focus areas: Pharmaceuticals, Chemicals, Paper, Transportation Did you know that? Marc likes practising mountain hikes in summer or wintertime Marc.LIVINEC@eulerhermes.com Copyright Allianz 22-Mar-18 8

9 SECTOR RISK INSIGHTS PHARMACEUTICALS FINE SALES PERFORMANCE; PRESCRIPTION MEDICINES ON A STRONG UPTREND AGAIN IN 2018 Global drug sales to reach near USD850bn (+5%) in 2018 in spite of a lack of growth in Over The Counter segment (OTC medicines that do not require any physician s order) Future growth of drug sales fuelled by the doubling number (25 57) of New Molecular Entities (NMEs) registered by the US Food and Drug Administration (FDA) last year To watch: US drug price gouging might cause a public backlash and hamper drug makers pricing power in the biggest world outlet Global sales (in USD bn) by type of drug Sources: Evaluate Pharma, Euler Hermes Marc Livinec Copyright Allianz 22-Mar-18 9

10 SECTOR RISK INSIGHTS CHEMICALS THE SURGE IN CHEMICAL OUTPUT THAT TOOK PLACE IN H IS EXPECTED TO CONTINUE IN H Chemical output expected on a rise by 2.5% in EU (28) and by 1.1% in the US at end June 2018 on a yearly average EU chemicals benefiting from high demand thanks to its long-time focus on specialties enjoying strong market position Low-cost competition from US (and Asia s) chemicals stemming from a cheap cost of ethylene Evolution of the volume index of chemical output (yearly average) To watch: (i) Volatility of fossil fuel prices impacting feedstock costs; (ii) Farming revenues still too low to make agrochemicals outlook brighter in the middle run (f) Sources: Global Insight, Euler Hermes Marc Livinec Copyright Allianz 22-Mar-18 10

11 SECTOR RISK INSIGHTS TRANSPORTATION FUEL PRICE VOLATILITY AS A KEY COST DETERMINANT World trade growth (+3.9% expected in 2018) to be considered as the main growth driver for freight transport, especially for road and sea transportation Breakdown (in value) of means of transport worldwide Except for rail transport which usually requires electricity, very high dependency of all means of transportation on (rising) fuel prices Air transport enjoying a strong expansion in international passenger traffic (demand up +7.6% over 2017 vs. 2016) To watch: Low-cost airlines competition spreading out over long-haul routes Sources: Oxford Economics, Euler Hermes Marc Livinec Copyright Allianz 22-Mar-18 11

12 THE TEAM SERGEY ZUEV Sector Advisor for consumer-oriented sectors Before joining the Economic Research Department in September 2017, Sergey worked for several years for the French subsidiary of Euler Hermes as a credit analyst. His responsibilities within the team evolve around analysing latest developments in the consumeroriented sectors such as retail, household equipment, agrifood and software services. Focus areas: Retail, IT, Construction, Textile Did you know that? It s still a secret Sergey.ZUEV@eulerhermes.com Copyright Allianz 22-Mar-18 12

13 SECTOR RISK INSIGHTS RETAIL WHAT S UP WITH THE RETAIL APOCALYPSE? Top-10 bankruptcies (by company revenue) in the retail sector worldwide Big-ticket bankruptcies and unprecedented number of store closures There is no underlying demand problem What is driving the increase in the sector risk? (+61% in Medium risk over 3 years) Copyright Allianz 22-Mar-18 13

14 SECTOR RISK INSIGHTS CONSTRUCTION POSITIVE DEMAND PICTURE VS STRUCTURAL CHALLENGES The infrastructure backlog until 2030 Segment Number of Projects Sum of Planned Financing (USD bn) Railway Transport Roads and Bridges Power and Utilities Maritime Transport Air Transport Inland Water Transport 9 5 Rise of infrastructure investment in Europe, US, China and India and Trump s 1,5 trillion USD infrastructure plan advancement through congress Wage pressures coming from skilled labor shortage Total Copyright Allianz 22-Mar-18 14

15 SECTOR RISK INSIGHTS TEXTILE NO GOOD NEWS FOR DEVELOPED MARKETS 5-year sales CAGR 15% Top 10 textile markets (size of the bubble = textile sales) 10% 5% 0% -5% -10% India Brazil China Russia France Japan Italy UK Germany USA -15% $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 Textile spending per capita Low risk Medium risk Sensitive risk High risk Sources: Oxford Economics, Euler Hermes proprietary database Entrance of new players (Amazon s Prime Wardrobe, new direct-to-consumer brands) Rising investment costs required to mitigate sustainability impact of the fast-fashion business Copyright Allianz 22-Mar-18 15

16 THE TEAM MAXIME LEMERLE Head of Sector and Insolvency Research Maxime joined Euler Hermes in 1993 as a credit analyst for Euler Hermes France, specializing on the food and retail sectors. He then moved to the Research team in 1999, first working on sectors, then on macroeconomic analyses, before becoming the team leader for global forecasts. Maxime now leads cross-cutting sector and insolvency research and is in charge of sector risk ratings. Focus areas: Automotive, Insolvencies Did you know that? You re looking at a ski champion - and the inventor of the Euler Hermes Global Insolvency Index Maxime.LEMERLE@eulerhermes.com Copyright Allianz 22-Mar-18 16

17 SECTOR RISK INSIGHTS AUTOMOTIVE SOLID SALES PERSPECTIVES; FASTER AND MORE CHALLENGING MARKET TRANSITION Global market to exceed 98 millions units in 2018 (+2.5%), despite easing Asian and European demand and ongoing US and UK weakness Challenge#1: the accelerating transition to electric vehicles (EV) Challenge#2: the innovation in E-mobility, from autonomous driving to new services To watch: Key markets (China and US), changes in subsidies, trade negotiation and Tariffs EV Vehicle New Registrations (in thousand) Sources: OICA,EIA, Euler Hermes Maxime Lemerle Copyright Allianz 22-Mar-18 17

18 GOT QUESTIONS? Ask Us Anything (we don t mind at all) File name department author Copyright Allianz 22-Mar-18 18

19 THANK YOU Sector Risk Economic Research Paris 21 March 2018 Copyright Allianz