Large corporates may need half a trillion euros of additional

Working Capital Requirement financing in 2021

After more than a year of sanitary and economic crisis, firms are currently dealing with the grand reopening: an environment of economic recovery, defined by a strong demand rebound alongside severe shortages in inputs, labor and final goods. In this context, how will corporates’ Working Capital Requirements (WCR) change globally and across sectors in 2021? Euler Hermes’ economists investigate in their latest report.

Executive summary:

• In 2020, Working Capital Requirements in the West increased (+5 days in North America and +1 day across Western Europe) while it dropped in regions such as Latin America (-3 days), Eastern Europe (-2 days) and APAC (-1 day). Inventory management and government support explain most of this divide. In the US and EU, severe lockdowns pushed companies into a “forced” stockpiling mode, which was fortunately tempered by the “invisible bank”, i.e. the very accommodating management of payment terms between customers and suppliers, partly financed by liquidity support measures. 2020 saw a surge in WCR across industrial sectors: +13 days for metals to 95 days, +9 days to 117 days for machinery, +4 days to 84 days for paper and +3 days to 87 days for automotive.
• Looking ahead, we estimate that large companies will face a record increase of EUR453bn in WCR in 2021, equivalent to +4 days of turnover, up to EUR8.4tn. This comes in a context of the strong demand rebound triggered by the grand reopening, alongside severe shortages in inputs, labor and final goods. The surge in WCR already observed in most developed economies will ramp up in 2021, while WCR would remain well under control in a few emerging countries, notably in China (-6 days). In both the US and the Eurozone, we expect WCR to rise by +4 days.
• While all sectors will see a rise in WCR, consumer goods sectors could see the biggest jump. Last year was a year of divergence. We expect many global sector WCR levels to resynchronize on the upside in 2021, with retail (+9 days up to 52 days) and agrifood (+8 days up to 81 days) seeing the largest rises, followed by industrial sectors such as metals (+7 days up to 103 days), transport equipment (+5 days) and machinery (+4 days).
• Stocks matter: Along with the “just in case” model of inventory management, and the end of “just in time” for most sectors, rebuilding stocks in an environment of supply shortages will be the key driver of the increase in global WCR, notably across Western European countries. In 2020, Days Inventory Outstanding surged by +5 days in North America and by +1 day in Western countries, while the drop in inventories across Emerging Markets made up for the stockpiling in developed economies. In 2021, we expect pent-up demand and the massive restocking policies of Western companies in the midst of global supply-chain disruptions to weigh notably on their WCR levels. However, in 2022, reduced supply bottlenecks should mitigate the soaring inventory fallout on developed countries’ WCR.