2020 Predictions and Pricing: Chemical Manufacturing
Central to the modern world, the diverse chemical manufacturing industry (across oil, gas, plastics, and chemicals) has seen a tumultuous decade, with macroeconomic and business environmental factors gaining strength.
Looking forward, adaptability will be key.
Predictions for the Chemicals Industry
1. Ongoing Uncertainty and Volatility
On top of the expected uncertainty and volatility in the chemical industry in 2020, COVID-19 has added yet another dimension of uncertainty. While late 2019 estimates already expected a drop in overall manufacturing levels for 2020, current events have caused a reset on demand expectations in the chemical industry in 2020. While recovery is expected in the second half of 2020, the amount of recovery is very dependent on the downstream markets served and the degree of a resurgence of COVID-19 as the year progresses. The strength in demand for medical and food packaging applications contrasts sharply with severe declines in demand for the automotive sector. These trends are expected to continue in the months ahead, while the recovery of economies will help to strengthen demand in weaker sectors.
Other factors contributing to uncertainty and volatility are increased packaging and shipping costs. Increased levels of e-commerce are contributing to the demand for more packaging materials, which in many cases differ from planned expectations, driving shortages and resulting cost increases. Shipping costs have been volatile due to variability in demand and availability of trucking capacity. International shipments have exhibited cost variability due to insufficient demand and cancellation of shipping vessel routes, as well as the use of tankers for oil storage, reducing capacity and increasing costs.
International trade relations have also contributed to instability, whether the US-China trade war or the impact of Brexit. The chemical manufacturing industry has been caught in the crossfire of the U.S-China trade war, which has seen tariffs affect $15.4 billion in Chinese chemicals and plastics, and $10.8 billion in U.S. chemical and plastic exports, with tariffs reaching as high as 25%. Ongoing uncertainty of the outcome of trade negotiations with China creates unpredictable chemical demand, affecting investor sentiment and overall outlook – which, in turn, can lead to modifications in long-established supply chains.
Such volatility in the market will require pricing to be updated frequently to reflect customer value, market demand, and changing costs.
2. Oil and Gas Prices to Stay Low
While demand for oil was expected to decline in 2020, not only have the events mentioned above exacerbated declines in demand and prices, but international tensions have contributed to price levels not seen for decades. The squabble over oil output between Saudi Arabia and Russia was a primary contributor to these reductions, with some increase in price and stability starting to become evident.
Although there will be further dips and spikes, oil and natural gas prices will remain relatively low, resetting economics for the production of many downstream derivatives.
Companies are currently taking a hit in the form of the Coronavirus, having seen a dramatic decline in China’s demand. Chinese demand and production are now on the rise, but the impact of shutdowns in other countries is creating significant imbalances that will take time to stabilize. Again, a resurgence of COVID-19 could stymie recovery in demand.
3. Market-Specific Concerns
The chemical manufacturing industry is closely tied to its end markets, and despite past gains in construction-related chemicals, home builder confidence in the US is at its lowest level since 2012.
Medical, hygiene, and food packaging markets are benefiting from demand surges due to the recent pandemic. In some cases, demand has shifted from B2B to B2C channels, causing shifts or reconfigurations in production capacities. Demand in these sectors should remain strong throughout 2020.
Oil and refining services are being impacted heavily by the previously mentioned reductions in demand and price, causing the idling of gas and oil production and subsequent impacts on refining and downstream derivatives, adversely impacting chemical products used to serve those markets.
In the automotive sector, many assembly plants stopped operation in 1H 2020 and are now beginning to reopen. Economic recovery will have a major impact on the willingness of consumers to be able to afford new auto purchases.
Still on the table but potentially delayed are increases in electric vehicle (EV) sales (to support meeting greenhouse gas reduction targets), meaning greater demand for lithium chemicals and membrane separators, and plastics – which will play a bigger role in reducing automobile weight. Refrigerants will still be needed to remove heat from passengers and battery packs, but EVs will need fewer chemical fluids than internal combustion vehicles. The shift will mean less dependency on brake fluids, engine oil, gasoline, and diesel.
In these headwinds, chemical companies are investing in innovation and looking for new growth opportunities, revenue streams, and technology development.