How covid-19 is impacting the global chemicals industry

14 April 2020 Consultancy.eu

The coronacrisis is having a major impact on the chemicals industry. Demand for chemicals is experiencing severe shocks across end-markets, global supply chains are disrupted, stock prices of chemical companies have taken unprecedented hits, and the competitive order of producers has changed virtually overnight.

Experts in the Chemicals practice of Strategy&, including Lucas Prat Bertrams, Iris Herrmann, Nils Naujok and Oliver Lofink (Europe), Fred Ozeir (Middle East) and John Corrigan and Sarah Rodriguez (North America), outline seven major impacts of the current crisis on commercials and operations, and how companies and governments can react.

How chemicals in impacted

1. Abrupt oversupply and imbalances from supply disruptions and demand shocks
Demand destruction has accelerated the chemical industry into an oversupply situation which was already looming pre-covid. The automotive, transportation and consumer products sectors are among the hardest hit end-markets, with demand for chemicals falling by up to 30%. On the other hand, demand for pharmaceuticals, food additives, and disinfectants is peaking, and chemical companies exposed to these sectors are reporting record outbound volumes.

How is the coronacrisis impacting the chemicals industry?

2. New world order as oil price collapse shift regional feedstock cost advantages
Last month, the price of crude oil suffered its biggest drop since the start of the gulf war in 1991. This collapse caused a major shift in chemicals feedstock prices and the global competitive order. The US, losing its cost advantage from shale gas, and the Middle East are most negatively impacted.

The effects on Asia, with China being the number one importer of crude oil globally, are mixed, as lower input prices are offset by lower output prices. Europe benefits from lower chemicals feedstock prices and from more specialty chemicals products which are less exposed to the price of oil.

3. Accelerated deglobalisation of supply chains
In response to major supply chain disruptions, chemical companies have started to (partly) relocate or ramp-up the production of critical chemicals supplies and medical goods closer to end-customers (for example, pharmaceutical active ingredients, disinfectant gels, masks). Trade conflicts and structural sector trends were already impacting supply chains and the deglobalisation trend is now accelerating.

4. Bold moves as new winners and losers emerge from tumbling stock markets
Since the start of 2020, chemical companies have seen stock prices fall dramatically and their future is now depending on their exposure to COVID-19 (and oil price effects) and financial strength. Cash-rich companies that are positively affected may be able to seize opportunities, act counter-cyclical and come out stronger. Financially weak companies with disadvantaged portfolios may end up in distress situations and not survive in their current size and shape.

5. Unanticipated boost for deal making which could otherwise have stagnated
In a major change compared to recent years
, the chemicals M&A market has now come to a near standstill. However, this crisis may give a boost to the market that could otherwise have stagnated, with valuations at peak levels and a softened demand outlook before the pandemic.

6. Unique catalyst for innovation and new business models
A crisis is often a catalyst for innovation, establishing new industry structures and cost levels. For the chemicals industry, this is a unique opportunity to get closer to end-users and accelerate innovative digital enabled business models that address customer needs. By interacting with customers, chemical companies can avoid the commoditisation trap and price on value, instead of per ton.

7. Urgency to achieve responsible value chains for future generations
Despite these challenging times, the chemicals industry should keep long-term objectives that consider not only economic, but also social and environmental aspects at the heart of its response plan. The chemicals industry can build on a long history of improving our standard of living and should leverage its innovation strength and resilience to enable responsible value chains (from contributing to safe and affordable food and clean water access, to carbon free energy and transportation).

The opportunities are also plenty and include technological developments around 3D printing, polymer recycling, green hydrogen as a source of energy, bio-based products etc. Now is a unique opportunity to increase green investments via government stimulus packages and reach the United Nations sustainable development goals.

Reacting for the better

To come out of this crisis stronger, chemical companies should mobilise and address the public health crisis, stabilise and absorb the financial impact, strategise and make bold moves to capture unique opportunities from this crisis and achieve responsible value chains for the future. Eight concrete recommendations:

1. Ensure employee health and safety, salvage business continuity with tight cash and liquidity management, surgical cost cutting, and understand the company’s financial health under a prolonged covid-19 impact scenario to not come out of the crisis weakened.

2. Reap the benefits of government stimulus packages and have a prioritised list of shovel-ready projects that meet policy priorities (stimulate the economy, ensure security of supply for essential goods, meet decarbonisation, circular economy and social impact objectives).

3. Understand the competitive cost position and break-even point. Monetise value from market volatility, portfolio optionality and services for commodity chemicals products.

4. Emphasise value creation and customer and application integration. Price based on value and outcomes delivered for specialty chemicals products and solutions.

5. Look for M&A opportunities to make unanticipated and bold moves, accelerate growth, complement capabilities, expand portfolio (e.g. bio-based materials, circular solutions).

6. Create new technology-enabled business models to address end-user needs and build capabilities to scale solutions across a fragmented customer/application base efficiently.

7. Find a new balance for supply chain resilience and costs. Launch collaboration programs to reconfigure and (partly) relocate supply chains in line with structural market changes.

8. Put purpose at the heart of your response plan to deliver profitable and responsible growth, and to achieve sustainable value chains for generations to come.


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