Pandemic could continue redrawing the map for chemicals trade

LONDON (ICIS)–The chemicals sector has the potential to become less global and more regionally focused in the aftermath of the pandemic, according to KPMG’s head for the sector, as the world becomes more localised.

The disruption to global supply chains seen during the pandemic may drive a shift in perspective away from global markets and back towards a regional focus, according to Paul Harnick.

“Other big thing for me going forward is what does this mean for the globalisation of chems industry and supply chains, and whether we start to see a massive dislocation in supply chains, becoming much more localised and regionalised,” he said.

“I think that’s something we need to keep a very close watch on, and may see that chems industry becoming less global in the way product moves,” he added.

Geopolitical developments over the last few years had already started to narrow industry focus on home markets, with the US-China trade war, the re-imposition of sanction in Iran and the UK’s vote to leave the EU all corroding the low-friction globalised trade networks established in the last few decades.

Increasing tension between key economies and the use of less favourable trade terms as an instrument of realpolitik has impacted on the status quo of intricate trade routes across the globe.

SHIFTING TIDES FOR SUPPLY CHAINS
The wisdom of the drive to make supply chains as agile as possible, with material for some forms of production arriving just before it is needed and food retailers keeping less warehoused stock, has been called into question by the impact of the pandemic, which has made fast light-weight links look like a vulnerability as much as an asset.

“The pandemic exposed the dangers of over-optimising processes, which leave little slack to deal with sudden setbacks. Instead of ‘just in time’, the ethos will shift to bigger ‘just in case’ inventories,” said Mark Cliffe, an analyst at Dutch bank ING, in late April.

The progress of the pandemic across the globe since the start of the year has led to disruptions, first in the Asia Pacific region which impacted on western producer’s local operations and as well as their global supply chains.

Some disruption has continued, with India’s more recent lockdown, one of the most intense in the world, resulting in significant gaps in global chemicals value chains, particularly for agrochemical and pharmaceutical intermediates, according to BASF CEO Martin Brudermueller.

The impact of the crisis on populations across the world has also resulted in significant impacts for firms that have migrated back-office services overseas, according to Harnick.

“We’re telling clients to be aware of where they have a big reliance on back office shared service centres, we’re seeing people going down with illness and certain jurisdictions, particularly India, not having the infrastructure to be able to allow people to work from home,” he said.

“We’re aware of a large global shared service provider running at 4% capacity in India because employees left the cities and gone back to villages due to the government shutdown, so there was no way to get them working remotely,” he added.

The supply chain disruption in Europe is understood to have been relatively modest through the pandemic so far, despite various flashpoints when lockdown measures were at their tightest, and the advent of the pandemic following  years of geopolitical tensions could lead to further rationalisation fo supply chains closer to home.

“From a chemicals industry perspective, looking towards post-covid, what does that mean for emerging markets?,” said.

“The big risk for emerging market [EM] economies within the chemicals industry on the back of this is that those global supply chains we’ve all gotten used to start to be reassessed and localise and regionalise, which raises a big question about the sustainability of certain assets in certain parts of the industry in certain EM countries.”

Speaking at a press conference earlier this month, Arkema CEO Thierry Le Henaff state that the shift towards greater regionalisation in the sector has been underway for some time, and that the 2020 pandemic is unlikely to slow that.

“[Coronavirus] will not change significantly the flow of chemicals in a material way, because chemicals are being more and more regional. That has been the trend so far, and I don’t think that will change,” he said.

DIVERGING FORTUNES IN CHEMICALS 
A split has emerged as the pandemic has continued for chemicals firms depending on end market, with specialty chemicals producers, particularly those exposed to healthcare, personal care, pharmaceuticals or cleaning products, experiencing much less disruption than more commoditised players and those exposed to industrial and automotive end markets.

The mergers and acquisitions market is largely closed at present as companies look to preserve liquidity reserves and future valuations of assets become increasingly difficult.

Expectations of lower multiples for sellers in light of more conservative valuations means that sellers with no pressing need to divest are likely to hold back for a while after the crisis.

Moody’s has noted that liquidity levels are weak for companies it judges as “speculative grade”, including Momentive Performance Materials, Universal Fiber Systems, Polymer Additives and Eagle Intermediate Global, none of which have accessed credit markets since the onset of the pandemic, it said.

None of those firms are thought to be in trouble at present, but liquidity concerns and sharp demand falls for commodities and intermediates producers could lead to some cheap sales for firms with cash to spare, according to Harnick.

M&A ON HOLD
“M&A right now is clearly shut down. One of the things coming out of it are going to be companies who are going to be very badly hit by this, those who came into this with low interest cover, high net debt to EBITDA [earnings before interest, tax, depreciation, and amortisation], and weak liquidity are going to find it very challenging to survive,” he said.

“Once we get out of it, six to nine months after, there will naturally be a split between companies that are struggling and companies that are in relatively good shape, with cash to spend, who will be able to possibly acquire some decent assets at relatively low pricing,” he added.

M&A deals that had already been announced are largely moving forward, but some, such as OMV’s acquisition of an additional stake in Borealis from Mubadala, are seeing renegotiated payment schedules, and others are understood to be re-examining price tags in light of the downturn.

“We heard in the last couple of weeks of a deal mostly finalised where the buyer has gone back to the seller and requested a new valuation,” Harnick noted.

COPING STRATEGIES
While the economic impact of the pandemic is expected to be far more substantial than the 2008-2009 downturn, which was a global financial crisis rather than a total global lockdown, companies are looking towards the coping mechanisms that they employed in the last global crisis.

“A lot of the response has involved dusting off some of the things that we last saw in 2008-2009, so working  capital management is coming very strongly to the fore, so it’s doing everything you can, granular analysis to protect and preserve cash,” Harnick said.

“There is still the hope that this proves reasonably short-lived, you don’t want to give away the family silver, so what can you pause without disadvantaging yourself down the line?,” he added.

Front page picture: Chemicals tanker in the Netherlands; archive image
Source: Global Warming Images/Shutterstock

Focus article by Tom Brown