Chemical Industry Predictions to Look Out for in 2023 

It has been another challenging year for many companies in the chemical industry, with ongoing supply chain constraints and persistent inflation, driving the need for significant price increases to sustain profit margins. 

While the US chemical sector has experienced its best year in more than a decade, Europe has been struggling to deal with the ban on oil imports from Russia (the biggest supplier to the EU last year) and the closure of the Nord Stream gas pipelines. Just this month, the G7 has imposed a price cap of $60 per barrel on Russian oil exports to other countries. 

Dr. Markus Steilemann, CEO of German materials giant Covestro AG, warned of “partial load operation or a complete shutdown of individual Covestro production facilities,” and that “a further deterioration of the situation is likely to result in the collapse of entire supply and production chains”. 

Against this backdrop, you’d be forgiven for thinking a global recession was the least of the industry’s worries. However, projections of lower demand and increasing uncertainty is pushing companies to the limit. 

At Pricefx, we’ve spent the last 10 years helping companies in the chemical industry to prepare for just such uncertainty, providing the tools to help them maximize profits, reduce risk, execute value-based pricing, and respond faster to a constantly changing market landscape. 

In this article, I’ll discuss the trends in 2022 that surprised me, give you my top predictions for 2023, and share what I think companies in the chemical industry should be focusing on in preparation for another uncertain year ahead. 

What Chemical Industry Trends Surprised Us In 2022?  

The extent and persistence of inflation over the past year has truly surprised me. A few older-timers will have seen something similar in the past (like double-digit US mortgage rates during the 1980’s), but even I was shocked by how high inflation got this last year—particularly in developed countries.  

For the current generation, however, this is a whole new experience. They simply don’t have the history under their belt to understand or deal with inflation at this level. This is going to be a significant challenge for companies in the chemical industry in 2023.  

Another thing that continues to amaze me, is how difficult it’s been for some companies to evaluate and address cost challenges. I would have expected most companies to have noticed how quickly their costs were changing and to have sought ways of mitigating the impact of that. But not so. There is still much work to be done by companies in the chemical industry to improve their costing systems and forecast cost systems to enable pricing decision-makers to recover margin. 

Top 3 Predictions and Chemical Industry Trends for 2023 

1. Combatting Pricing Fatigue with Automation 

Ever-growing inflation and ever-changing costs during 2022 have created fatigue in chemical pricing and sales teams.  

As mentioned, many companies haven’t invested in the tools that would automate key processes like executing price changes, and such frequent updates are causing a lot of manual and tedious work for pricing teams. The exercise may have gone from an annual one to a semi-annual or quarterly one (maybe even monthly!). There’ll even be some products where the price changes every week.  

While companies that sell commoditized materials may be used to this, it’s not typical for companies selling differentiated products at value-based prices. Despite preferring not to connect costs to customer pricing (because they’re selling based on value), it’s been almost impossible for them to avoid underlying costs this year. Those that would normally raise prices once a year, have had to do so many more times, which has come as a surprise and a stress point. 

I expect to see companies in the chemical industry finally turning to technology and automation to significantly reduce how long price changes take (from weeks to hours) and to greatly improve the accuracy and profitability of the prices they execute, whether cost-based or value-based. 

2. Pricing Complexity as A Result of ‘Temporary’ Surcharges 

Over the past few years, many chemical companies have used surcharges as a way of dealing with inflation issues, supply chain shortages, and rising costs. This decision always surprises me.

Firstly, you need a mechanism for keeping up with your surcharges and to be able to document them internally—what you’ve done, when you started, how to present them separately on the invoice, etc. 

Secondly, the implication of surcharges for customers is that they are temporary and there is a (fair) expectation that you’re going to remove them at some point. A great challenge for many companies this year will be dealing with the complexity around removing surcharges, especially when what they thought was temporary, isn’t so temporary after all. Inflation, for instance, while starting to moderate in some countries, hasn’t gone away. So, many will have difficult choices to make. Do they keep the surcharge in place? Or somehow embed it into their base price? Because the fact is: they still need it. 

Another way that surcharges add to pricing complexity for companies in the chemical industry is how they muddy the competitive pricing waters. When a customer challenges a price because a competitor has offered a better one, it’s very difficult to understand the competitor’s base price and whether surcharges are included. This makes it’s much harder for the sales team to have an apples-to-apples discussion with the customer and work out the right competitive price level to be at. 

Even though customers do understand the pressures companies are under, in the current economic climate, I expect more to be asking when surcharges will be removed as they need to see their cost basis reduced. So, chemical companies will be focusing on how to secure a soft landing with their price reductions. I also suspect many will drag their feet on the move in order to preserve margins as long as they can, but this could cause customer churn. 

3. Customers Will Want More Assurance Around How Their Price Is Going to Change 

Many companies will have experienced some very abrupt and severe price changes in the past few years that were completely unanticipated. Producers all down the supply chain, therefore, are likely to push for more certainty and understanding around future prices going forward. So, I expect chemicals customers to start asking for more assurance around how their prices will likely change in the future. This doesn’t mean certainty around what the prices will be, but rather around how they’re going to move. 

Some customers will still opt to go with the market in order to ensure the lowest possible prices when they’re down (and risk suffering the highest prices when they’re up), but those that did this in 2022 have learned some hard lessons and are likely to reassess this approach for 2023—perhaps getting the best of both worlds by buying some of their materials under contract and some on the spot market.  

But it’s a two-way street. Sellers will also have their own ideas, depending on their view of future supply and demand, as to how much they’re willing to contract under formulized prices and how much they want to sell on what they might perceive as higher spot prices in the market.  

So, I expect there will be more complex negotiations this year. For a customer that’s bringing significant demand to the table and has a good relationship with their supplier, it can have a positive outcome for both parties. 

How Should the Chemical Industry Prepare for 2023?  

1. Avoiding Chasing Volume with Price 

A big concern to watch out for right now is the supply-demand balance.  

Projections are for demand to be down in at least the first half of 2023. Many companies will consider chasing demand by cutting prices. It’s what I call ‘pushing the easy button’. Unfortunately, your competitors have the same easy button and will quickly follow suit.  

Many areas of the chemical industry have high maturity, and thus somewhat of an equilibrium between market share and production capacity share.  As demand shrinks, the reduced available volume for sales tempts producers to use the easy button to regain volume, but then disturbs the market equilibrium on share. And, unless one of you has a major differential advantage, it will probably be split among competitors in a very similar ratio to the way it is now. So, cutting prices to drive volume will only have the effect of each of you gaining lower profits from lower prices.  

Times like this require significant discipline and a recognition that no one is getting the demand or volume that they want, so you just need to get over it and do the best job you can—pricing the volumes that you have and not cutting price to chase after volume that doesn’t exist. 

2. Steer Away from Surcharges 

We have already discussed the pitfalls of surcharges for companies in the chemical industry. Companies that implemented a lot of surcharges over the past couple of years have learned that it is not as easy as they thought, and they are trying to figure out how to unwind them, because cost challenges and inflation don’t look likely to go away anytime soon and surcharges are meant to be temporary.   

When dealing with increased costs, I strongly believe companies should simply increase prices. Taking a more ‘permanent’ route is easier and not irreversible should you wish reduce to prices at a later time. It also makes it harder for customers to mark out the line item on the invoice for a surcharge and to say “I’m not paying that”.  

3. Invest In Capable Technology 

 I honestly believe companies in the chemical industry should be investing in new technology. Pricing will only get more complex and more volatile. It’s time to address pricing fatigue, human error, and eroded margins caused by not have the right capabilities in place. 

Chemical companies need to invest in technology that will support their pricing strategies, automate tedious and time-consuming tasks like mass pricing updates, and provide better bi-lateral flow if data between their pricing and CRM systems. They need to be keeping a closer eye on costs, competitors, and changes in the market and gaining better visibility of their pricing landscape. They need to be moving towards a value-based pricing approach and delivering a better B2B experience, through faster quote turnarounds, competitive customer-specific pricing, easier management of rebates and special agreements, and complex negotiation support. 

Reinforced with the right technology, companies will set themselves up to weather the incoming storm and assure a strong position for when things get easier. 

2023: A Year of Discipline for the Chemical Industry  

Ongoing cost increases, inflation, and supply woes continue to plague the chemicals industry, and look set to see us well into 2023.   

As chemical companies head into the new year, they’ll need to bring a good deal of pricing discipline with them. Many will have to unwind surcharges they implemented when they thought unfavorable conditions were just temporary, others will have to face the fact that you can’t increase demand by cutting prices. All will likely be finding ways to give assurances to customers about how prices will move going forward.  

 Those that invest in appropriate automation and pricing technology will not only make themselves more resilient to such uncertain times, but stronger for when things get better. 

If you’d like to learn more about the best features that the Pricefx pricing software solution offers chemical industry players, click on the image below to learn more in this handy article: