COVID-19 pandemic on the chemical supply chain.

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Sarchem Labs

General Manager at Sarchem Laboratories, Inc.

Sarchem Laboratories offers a combined 60 years of professional experience in the field of pharmaceutical intermediaries, specializing in custom synthesis. Founded in 1984 as a research center focused on anti-viral drugs, Sarchem Laboratories has expanded over the years to the adapting needs of the pharmaceutical, nutraceutical and medicinal industries to offer an extensive product list cultivated with passion and precision. With clients such as CROs, universities, government entities and pharmaceutical companies of varying sizes, Sarchem Laboratories has provided top quality custom synthesis for over 25 years globally.

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The chemicals industry touches nearly every product we all use daily. As the impacts of COVID-19 ripple across the globe and economic activity grinds to a halt, we see that chemical companies operate in a fundamentally new reality. Demand for chemicals is experiencing severe shocks across end markets, global supply chains have been disrupted, stock prices of chemical companies have taken unprecedented hits, and the competitive order of chemicals producers in the US, Middle East, China, and Europe has changed virtually overnight.

How long will these effects last? How profound and structural will they be? Time will tell us. Unfortunately, a quick recovery from the situation is unlikely, as we already see a rebound in new COVID-19 cases in different parts of the world. Although the COVID-19 pandemic has a short-term positive impact on greenhouse gas emissions, it puts the ambitions and timeline for reaching sustainable development goals at risk.

However, as global supply chains are reconfigured and governments consider stimulus packages to boost the economy, there is now an opportunity to accelerate large-scale investments to achieve sustainable value chains and turn this crisis into something positive for society.

In this article, I describe seven significant effects of the current crisis, the consequences for the chemicals sector, and the actions companies and governments should now consider.

1. Accelerated oversupply and imbalances from supply disruptions and demand shocks

Demand destruction has accelerated the chemical industry into an oversupply situation already looming pre-covid. The automotive, transportation, and consumer products sectors are amongst the hardest hit end markets, with chemical demand 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.

2. Changed global competitive order from shifts in chemical feedstock prices

Last month, the price of crude oil suffered its most significant drop since the start of the gulf war in 1991. This collapse caused a noticeable shift in chemical 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 are mixed, as lower output prices offset lower input prices. Europe benefits from lower chemical feedstock prices and from more specialty chemicals products which are less exposed to the cost of oil.

3. Deglobalization of supply chains

In response to significant 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, active pharmaceutical ingredients, disinfectant gels, masks). Trade conflicts and structural sector trends were already impacting supply chains.

4. New winners and losers will emerge out of 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 countercyclical 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. A boost for deal-making in a market that could otherwise have stagnated

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

6. A catalyst for innovation and new business models

A crisis often catalyzes innovation, establishing new industry structures and cost levels. It is a unique opportunity for the chemicals industry 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 commoditization trap and price on value instead of per ton.

7. Responsible value chains for future generations

Despite these challenging times, the chemicals industry should keep long-term objectives that consider economic, 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. It 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 UN sustainable development goals.

How to approach COVID-19

To come out of this crisis stronger, chemical companies should consider immediate actions, capture unique opportunities from this crisis and align the company towards a post-COVID-19 world:

1. 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.

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

1. 1. Understand your competitive cost position and break-even point. Monetize value from market volatility, portfolio optionality, and services for commodity chemicals products.

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

1. 1. Look for M&A opportunities to accelerate growth, complement capabilities, expand portfolio (e.g., bio-based materials, circular solutions), and achieve more competitive cost structures.

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

1. 1. 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.

1. 1. Put purpose at the heart of the response plan, manage costs in a strategic way, and build differentiated capabilities that enable profitable and sustainable growth.