Post-coronavirus, what will change?
The coronavirus pandemic has hit many industries hard and the chemicals industry is no exception. The severity of the problem should not be underestimated. The situation – with a global drop in demand, supply chain disruption, and total shutdowns in some industries – is worse than the global financial crisis of 2009.
Let’s look at the chemical markets: there is bad news and good news.
The bad news
■ Low oil prices: North American polymers have increasingly used gas-based ethylene cracking, while much of overseas production, particularly in Asia and Europe, is based on naphtha (via oil).
Dropping oil prices led to oil-to-gas price ratios of about 12x in mid-April. This is getting close to the rough rule of seven, where gas cracking loses its competitiveness versus the naphtha route. In any case, the global cost curve has significantly flattened, reducing margins and creating pressure to reduce expenses.
■ Auto manufacturing: On the downside, more than 230 auto plants worldwide had been shut down by mid-April 2020, eclipsing anything that happened during the financial crisis.
This hits the chemical industry hard since the transportation industry is responsible for about 17% of the value of total plastics sold in the US. Early hopes for a rapid recovery have been replaced by a feeling that recovery, when it does occur, will be slower and more uneven than originally anticipated.
And numerous difficulties accompany any plans for recovery. Workers, for example, need to be distanced and protected, and demand in some sectors may be slow to return.
■ Recycling: Another downside is recycling. Lower oil prices reduce the cost of virgin resin significantly but have a less significant impact on the cost of recycled resin, which is based on collection, cleaning, shredding and other processing, but not hydrocarbon feedstock costs.
By the third week of April 2020, oil prices dropped by 72% from the same period in 2019. High density polyethylene (HDPE) virgin resin prices followed, dropping about 35% during that time. However, baled HDPE for recycling – the raw material for recycled HDPE – increased 53%, indicating greater competitive pressures on recycling.
Recyclers face further pressure on the supply side. With strong demand for groceries and food take-out and delivery, governments have loosened restrictions on single-use plastics. However, recycling programmes have been curtailed due to worker distancing restrictions, collection restrictions, collection/recycle facility closures and reduced bottle consumption as the peak beverage bottle season begins.
This means that plastics waste will rise, while recycling suffers. With potentially greater volumes of plastic becoming available in the waste stream, now is the time for producers to scale up recycling initiatives. One avenue that we have been advocating for some time is Scale Circular Integration, which is where producers can bring some form of plastics waste to refinery/petrochemical complexes and use an assortment of technologies to gain the most value from the materials, including recreating virgin resin.
The good news
The first good news is that the bad news outlined above will diminish as the world recovers from the impact of the coronavirus pandemic. But there are longer term “good news” opportunities as well.
Certain market sectors and end uses present opportunities for chemicals companies. Smart, nimble companies can gain share in active markets including:
■ Medical supplies and equipment. The personal care/medical industry accounts for almost 10% of the total value of plastics sold in the US. The move toward disposability that began in the 1970s led to problems during the pandemic when supply chains faltered.
Medical equipment and supplies in the US are now almost 50% plastic on average. With demand high, the industry can expect a renewed effort to bring medical manufacturing onshore, which will require new technology and possibly new modified products that can be made on highly automated lines.
Another possibility is the design of more durable products that can be re-used to minimise potential shortages as well as environmental impact. Plastics producers need to be ready to compete against other materials through applications development to hold share and value.
Supply chain perfection will be important to serving this segment. Our spring 2020 survey of global industrial buying preferences indicated that reliability is the most important buying factor for the personal care/pharmaceutical industry.
■ Food. The pandemic has created a new respect for packaged food and for disposable grocery bags, where some bans on them were quickly lifted as the pandemic began to spread and some grocers prohibited the use of bags brought from home.
At the same time, restaurants have added or enhanced their takeout and delivery capabilities, increasing demand for plastics in the form of foam clamshell boxes, bags, plastic utensils and related items. As every consumer business has become a take-out business, producers should initiate efforts to inform consumers how plastic is helping, while also stepping up recycling efforts to diminish objections to plastics.
■ Working from home. Some mandated working-from-home (WFH) arrangements are likely to continue post-lockdown, as companies have invested in laptops and IT infrastructure and have now stress-tested WFH schemes. This trend should also increase demand for exercise equipment with plastic parts, adhesives and electronics, as well as for soundproofing materials, headsets and related gear.
■ Other unforeseen growth areas. Pets are one, for instance. Lockdowns have spurred the purchase and adoption of pets, meaning not only the production of more pet food but of more agricultural chemicals, preservatives and stabilisers, and packaging, as well as a range of products such as flea and tick repellents and animal shampoos.
While there are some opportunities created by the crisis, the larger opportunity for companies in the chemical industry lies in building greater resilience. Resilience can help them weather the crisis and have a stronger recovery afterward. As preparations for resumption of business get underway, companies should be taking five key steps:
1. Rethink operations in terms of both consuming and producing geographies. Post-crisis, the investment decisions of large industrial companies, customers of the chemical industry, will factor in geographic diversification goals and anti-contagion initiatives as well as labour, legal and taxation considerations. Chemical supply chains will need to harmonise with this change.
2. Lower existing cost structures. There are multiple opportunities to use automation, alliances, data and analytics, and new technologies such as artificial intelligence to reduce manufacturing and distribution costs. Other avenues to cost reduction include close examination of supply chain vulnerabilities along with inventory monitoring, as well as demand planning and projection.
3. Recalibrate industrial operations. While working to reduce costs and increase resilience, chemical companies can also look at new ways to help their industrial customers accelerate speed to market, enhance customisation capabilities and reduce environmental footprint – key emerging drivers in value-added manufacturing. Companies can do this by looking forward to their customer’s customer, finding unmet needs, by using big data and other emerging technologies to add value beyond just selling volume. Companies can explore the Scale Circular Integration already mentioned.
4. Step up innovation efforts. Chemicals companies can work with customers to identify new product candidates and bring them to market quickly. This includes developing products and methods, supporting new manufacturing technologies such as additive manufacturing, where chemical companies can also help enable the localised and customised manufacturing of finished goods. This approach will help meet customer needs while augmenting overall resilience.
5. Communicate more effectively. Through digital communications, companies can remain in close contact with customers, employees, suppliers and other stakeholders. This is vitally important as changes in the coronavirus situation may necessitate rapid action, including dramatic changes in course. It is also important to look for ways to meet social responsibilities in communities severely affected by the virus.
Companies that take steps to rethink and re-calibrate operations – and to stay in close touch with their customers – can come out of the crisis in a stronger position than their competitors. As a matter of fact, our global survey of industrial buyers also indicated that product support is the most important buying criteria in the plastics product manufacturing industry.
While the chemicals industry has been through difficult times before, the coronavirus pandemic presents the industry with unprecedented challenges. Those companies emphasising operational excellence, flexibility and innovation should be well positioned to weather the crisis and to resume profitable growth in a post-crisis environment. ■
Medical equipment and supplies in the US are now almost 50% plastic on average. With demand high, the industry can expect a renewed effort to bring medical manufacturing onshore
Those companies emphasising operational excellence, flexibility and innovation should be well-positioned to weather the crisis and to resume profitable growth in a post-crisis environment.
Paul Bjacek heads Accenture Research for the Resources industries. His career spans more than 25 years, including extensive project activities in manufacturing, marketing and distribution. Before Accenture, Paul was affiliated with Chevron and the Stanford Research Institute. Paul’s analyses are frequently published in the press and on the Accenture Chemicals Blog.
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