Europe chems supply chains strengthen but pre-crisis conditions still in the distance

LONDON (ICIS)–Activity along European chemicals supply chains is gradually reviving after the disruption of  of the coronavirus pandemic but pre-crisis operating conditions still remain a long way away, according to distributors’ trade group FECC.

The response to the pandemic led to border closures, quarantine measures and other disruptions that, particularly in the early days of European lockdown, resulted in tailbacks at some borders and disruptions at ports.

The level of disruption has eased since governments began to reopen economies, with the shockwaves of March-April continuing to ripple through the economy, but supply chains that were strongly impacted have started to revive, although pre-Covid conditions remain on the distant horizon, according to Dorothee Arns, director general of the European Association of Chemical Distributors (FECC).

“Supply chain operations are resuming slowly under the conditions of the ‘new normal’, but the current situation is still well away from what is was before the pandemic. Pace and intensity of recovery depend on the individual segments and regions,” she said.

“Nevertheless, March and April were very challenging months, especially after many European countries had unilaterally decided to close down their borders.

“This led to domino effects, triggered shortages of transport possibilities and partly also packaging material – an additional stress test for anyhow strained supply chains in the absence of import possibilities from other continents and air freight alternatives.”

The pace of recovery is contingent in part on the end markets served, with hard-hit sectors such as the automotive and aerospace industries remaining depressed.

Some of those shifts could prove to be longer term, with Solvay shutting down some of its composites production aimed at the aerospace sector and the International Energy Agency (IEA) projecting that air travel demand will be down 55% this year, with recovery likely to be slow unless a coronavirus vaccine is developed.

“The hardest-hit segments such as automotive or textiles face more difficulties in recovery, whereas in segments such as disinfectants, pharmaceuticals or building blocks for personal protective equipment and medical devices the demand is still extremely high, which helps those distributors with a high level of segment diversification to balance out some Covid-19 effects,” she said.

Distributors with more diversified end-market portfolios are in a stronger position but, aside from the immediate issue of securing sufficient financing, customer demand remains a moving target, continuing to lag the pace of reduced restrictions on movement and business re-opening.

“Apart from mitigating liquidity and cash-flow problems, the main issue for the next months is how to foster demand and consumer spending at a time which is still full of uncertainties,” she said.

Liquidity is especially important as a result of changing trade conditions as sellers look to reduce uncertainty, leading to instances when firms will only pass on goods for cash in advance, rather than on credit.

“On one hand, the overwhelming majority of distributors have long-standing, close relationships with principals and customers and already navigated previous crisis together,” Arns said.

“On the other hand, it is an economic necessity to closely monitor the financial risks, especially those originating from end markets, many of which – as non-system-relevant sectors – had to close down for a while due to COVID-19 with significant impact on their own cashflow and inventories,” she added.

Asia Pacific supply chains have normalised to a large extent but the pandemic continues to spread across the globe, with the World Health Organization (WHO) estimating that the number of new cases has reached a new high over the last week as a result of deeper spreads into developing economies.

Output in China has rallied since the government eased lockdown measures in April but demand in the export-oriented country is still affected by the situation in the west.

The crisis has raised questions over whether the shift toward responsive “just in time” supply chains has left countries exposed to disruptions such as pandemics.

“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,” wrote analysts at Dutch bank ING in April.

The crisis is likely to drive chemicals distributors to diversify further, but the level of competition in the sector and the evolution that has driven in the sector leaves little room for paradigm shifts, Arns said.

“Will this have an immediate impact on the supply chain management? There, I am not sure. As mentioned before, most players in the chemical value chain have long-standing contracted business relations and, fortunately, a pandemic is usually happening only very rarely,” she said.

“Most likely more emphasis will be assigned to diversify operations in general, be it sourcing or selling or logistic solutions. However, the competition on all chemical markets is so fierce and supply chains have been globalised and optimised so comprehensively over the past years that there is not too much scope for a complete strategic shift in this area.”

Analysts have also speculated that the impact of the pandemic on supply chains, and the drive towards more domestic focus and away from unilateral responses, such as the schism between northern and southern EU countries on a response to the pandemic, will accelerate a drive away from globalisation towards more regional markets.

Despite increasing levels of protectionism, chemicals supply chains remain extremely global and that is unlikely to change, although the shifts may forge more strategic partnerships between firms in different parts of the world, according to Arns.

“Scenario planning and the ability to respond quickly to changing market conditions have been key for success already since a while and even before the US-China trade war and Brexit. Despite the recently increasing protectionist tendencies, the chemical industry and related supply chains are very globalised,” she said.

“So, at this point in time I would not speak of a genuine shift, but local and regional supply chains might get a renewed impetus as complementary sources or fall-back options as a result of Covid-19. Probably, we will also see more strategic alliances emerging,” she added.

Front page picture source: Shutterstock

Interview article by Tom Brown