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What to Expect from the Chemicals Industry – Pricing Trends & Predictions 2020

February 17, 2020

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 

Although growth in the chemicals industry is likely to pick up in the second part of the year (according to Oxford Economics), the end of 2019 saw it slacken for basic and specialty chemicals used to make industrial goodssignaling a drop in overall manufacturing for 2020. 

The American Chemistry Council (ACC) predicts a slower economic growth in the U.S. (1.8%), with U.S. chemical output dwindling from 0.6% in 2019 to 0.4% this year, a lull likely to end in 2021 thanks to shale gas-based production. 

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%. 

Phase one of the recent ceasefire was meant see some import tariffs being phased out, but,  

in fact, it offers little relief for the industry, and ensuing uncertainty will likely cause unpredictable chemical demand, affecting investor sentiment and overall outlook – which, in turn, can lead to modifications in long-established supply chains. 

According to the European Chemical Industry Council (Cefic), after a 1% drop in 2019, European chemical production is expected to show no growth in 2020 due to its manufacturing sector being so vulnerable to the economic slowdown. 

The declining economic growth in Germany could have continent-wide knock-on effects. According to the German Chemical Industry Association (VCI), the region’s chemical industry is expected to grow by just 0.5% in 2020 (after a 7.5% drop in production in 2018 to 2019). 

Meanwhile, Brexit divorce terms are yet to be settled and could lead to new tariffs, import delays and chemical regulatory compliance issues, encouraging companies to take their business to continental Europe.  

Such volatility in the market will require pricing to be updated frequently to mitigate cost risks. 

 

2. Oil and Gas Prices to Stay Low 

The kind of economic uncertainty we’ve experienced throughout 2019 is damaging to oil demand and is expected to remain a key influence over prices in 2020, thanks to the China-U.S. tensions, ongoing conflict in the Mid-East Gulf and general dissatisfaction with the political status quo globally. 

But although there will be dips and spikesoil and natural gas prices will remain relatively low, driven by technological advances, new discoveries and the slowing of the global economy. 

Companies are currently taking a hit in the form of the Coronavirus, seeing a dramatic decline in China’s demand. 

The 2020 U.S. Presidential elections will play a big part in the future of the industry. A Trump re-election would see unencumbered support for oil and gas, but a Democratic president would likely bring regulations, bans, and taxes while backing renewables. 

And we can expect to see (recently-heightened) tensions in the Middle East continue to affect prices as it accounts for almost half of the world’s production. 

Forbes predicts 2020 will see prices for crude oil drop more than 10% due to weak demand growth (a result of slower global growth) and surging supply, with oil production expanding by 1.9 million barrels a day versus 2019 – more than half of which will come from the U.S. 

Some analysts, however, see oil demand recovering from its dip and say 2020 may see macroeconomic factors boosting oil requirements and strengthening prices. 

Forecasts from EIA predict Brent crude oil spot prices averaging $65 per barrel (compared with $64/b in 2019) and West Texas Intermediate (WTI) crude oil prices averaging about $5.50/b lower than Brent prices through 2020 and 2021. 

Feedstock prices will remain low given both supply and demand factors, which will allow for efficient but potentially squeezed prices. 

 

3. Construction and Automotive Industries Weakening 

The chemical manufacturing industry is closely tied to its end markets, and despite recent gains in construction-related chemicals, housing in the U.S. shows signs of weakened growth. 

Meanwhile, projections indicate flat-to-declining U.S. auto production through 2020, denoting lower consumer spending as well as a redirection towards used cars and electric vehicles (E.V.s). 

The increase in E.V. sales (to support meeting greenhouse gas reduction targets) will mean 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 E.V.s will need fewer chemical fluids than internal combustion vehiclesThe 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 opportunitiesrevenue streams, and technology development. 

 

Pricing Trends for the Chemicals Sector

 

1. The Environment Revolution 

The chemicals business is preparing itself for major disruption as consumer-led sustainability movements are set to shake up the status quo. 

Environmental groups have focused on chemicals in recent years and foresee an active 2020, pushing adoption of sustainable practices (doing away with single-use plastics and making packaging reusable, recyclable and compostableand promoting transparency into data pertaining to plastics production and waste. Consumers want companies to ensure that their chemicals are more environmentally friendly. 

The market for “green” chemistry is expected to reach $100 billion globally, so, it’s about time the chemical manufacturing industry improved how it talks about sustainable chemistry while continuing to encourage innovation. 

Companies need to anticipate the problems they want to solve by looking down the pipeline towards regulatory challenges and aligning efforts with sustainability goals. Since it is customers who ultimately drive business growth, they also need to place a greater focus on how products work in the customer context. (How they can recycle them, for instance.) 

 

2. The Digital Revolution 

Chemical makers are under pressure: rapid changes in digital technology, consumer expectation, and global competition. 

We’ll see a shift in focus towards gaining a better understanding of their operations and their customers. They’ll be adopting digital strategies that unify and streamline processes and enable a common data hub throughout the business. A strategy that embraces agility, adaptability, and innovation. 

The adoption of automation and Internet of Things (IoT) will free up resources and increase productivity and performance while cutting costs. 

And a move towards SaaS solutions and cloud applications will unlock the power of Big Data analytics and artificial intelligence (A.I.). 

Big Data analytics, driven by pricing cloud platforms like Pricefx, will bring real-time customer insight to enable customer-specific pricing. Pricing strategy teams will have better economic, procurement and demand forecasts. And data may even be integrated back into the supply chain, where both cost to serve and value are presented with unprecedented visibility to the customer. 

Together with customer data, companies will become more customer-focused, using integrated digital supply chains to create direct-to-consumer models. Pricing will move from static to being dynamic and value-based. 

Digital transformation of the industry will drive improved economies of chemical products as well as unlocking faster and more accurate pricing in chemical manufacturing and help companies maximize profit. 

Garth Hoff / Principal Pricing Solution Engineer

Pricefx

Garth Hoff, Pricefx, is an over 15-year veteran of the pricing industry.

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