What is the Impact of COVID-19 on Chemicals and Process Industries?
We’ve now conducted business for several months under the shadow of COVID-19, and it’s likely dramatically impacted our businesses and goals for 2020. Some sectors have seen significant decreases in demand for products, which may be starting to rebound as economies reopen and employment increases. Some sectors more closely tied to medical, hygiene, and food packaging have seen unprecedented demand and challenges in maintaining supply to customers.
A high degree of uncertainty remains on business conditions for the months ahead, as economies restabilize and the potential for a second wave of COVID-19 resurgence exists. While the full impact of this pandemic will not be known for some time, we can continue to learn from crisis events in the past to help with planning, strategies, and tactics for the remainder of 2020 and goals for 2021. The 2008 economic downturn and hurricanes impacting the US Gulf Coast are examples of events that continue to provide some insight into how to address the economic uncertainty being experienced today.
Patience and vigilance – the key ingredients
Most of the chemical and process industry sectors are mature in nature. As such, growth levels are modest in good times and market share typically mimics capacity share. Rash moves in current conditions are the formula for undermining price, profitability, and recovery. Patience and vigilance are needed to avoid actions that will cause deterioration beyond what the coronavirus pandemic itself creates. Key considerations:
- Imaginary volumes – Don’t chase imaginary volumes that aren’t available for sales. Volumes are down for all competitors; don’t assume competitors are stealing share.
- Maintain ongoing communication – Maintain very close communication with customers to understand demand and to ensure share shifts are not taking place with competitors.
- Defend key accounts – Let competition see you will defend key accounts, but don’t be the aggressor at other accounts.
- Capacity utilization is not the holy grail – Resist the temptation to keep capacity utilization at normal levels; it will result in price cuts that will further diminish profitability.
- Lower utilization will be the norm – If capacity utilization was tight before the crisis, it likely isn’t now unless you’re in the value chain for making hand sanitizer or medical products increasing in demand because of the coronavirus. There will be cost pressures to avoid shutdowns and avoid costs for restarting plants. A balanced view of plant costs and achievable contribution margin from sales must be taken to avoid missteps.
- “New” customers – Be wary of unfamiliar customers asking for supply, and existing customers demanding price reductions unless they are justified by transparency in falling raw material prices. This is not the time to be opportunistic and contribute to the start of a price war.
- Share stealing – Don’t steal share in mature markets, particularly in times of high variability and uncertainty. A price war will be the inevitable result and will lower everyone’s profitability. In mature markets, assume capacity share equals market share unless a significant differential advantage exists between suppliers.
- Price stability – Seek price stability unless participating in commodity markets where raw material transparency either drives reductions or allows increases in price.
- Maximize contribution margin, not volume – Ride it out and play for the best outcome on total contribution margin with your existing business.
- Plan for the upturn – Prepare for market stabilization and have a clear plan for the upturn after the crisis.
- Key metrics – Focus on per unit variable margin metrics to position for a rebound when volumes eventually rise.
- Costs that nibble at margins – Don’t forget to keep a close watch on packaging, freight, and distribution costs. Fuel costs may have declined, but driver shortages could have the opposite effect on the overall cost to serve and ability to supply. Availability of international ocean shipping capacity has fluctuated. Factor these into pricing decisions. Customers will understand as they will experience the same.
- Be strategic – Ensure price actions are taken in alignment with overall business strategy and not to maximize performance in a specific sales territory. The big picture for the business is what counts; all individual sales territories are likely to fall short of annual volume and earnings targets.
- Tighten control – Temporarily tighten oversight of price changes. It’s important that no renegade discounting take place to advance individual goals ahead of higher-level business goals.
- Adjust with care – Many raw materials for the chemical industry have a great deal of price transparency, which is monitored closely by customer purchasing agents. While the substantial declines in crude oil and derivative raw materials can be a silver lining to the crisis, they will be noticed by many customers who will demand reductions in product pricing, particularly on more commoditized products. Use pricing analytics and planning tools effectively to avoid giving away margin in excess of the cost changes. Perceived fairness in pricing will buy much customer goodwill.
- What about shortages? – In contrast to the suggestions above, there will be situations where some raw materials are in short supply or allocation. This could be also true for your company if it is producing products related to personal hygiene or medical care. In such cases:
- Be alert to price spikes – Be vigilant to identify and understand these and pass them on to customers, even though difficult. Price sensitivity will be high, and customers will chafe at these. Use evidence of the changes and the impact on operations to justify the increases.
- Remain in control – Anticipating shortages, have sales controls and allocation plans ready to implement to protect contract and loyal customers over opportunistic spot buyers looking for products.
While the duration of the current crisis is impossible to predict, it is possible to manage pricing decisions and actions in ways to position a business to maximize performance during the crisis and to position itself to ride the tide of rising business successfully. Patience, vigilance, and smart pricing actions aligned with strategy are keys. Leveraging this approach in past crises has proven it’s possible to survive the storm and emerge from it in a stronger position than before it occurred.